Harbor has launched a small-cap ETF, expanding its human capital investing suite.
The Harbor Corporate Culture Small Cap ETF (HAPS), listed on the NYSE Arca on April 13, offers exposure to small-cap companies with strong Human Capital Factor scores while constraining sectors to enhance overall diversification benefits.
The Human Capital Factor is a distinctive investment factor measuring corporate culture and its connection to future equity performance. The nontraditional factor was derived from Irrational Capital’s proprietary research and employee survey data along with other publicly available, grassroots sources such as employee reviews, Harbor said.
Quantifying (and ranking) human capital as an (intangible) asset (versus a cost/liability) on a company’s balance sheet has proven to lead to a large informational advantage in investing and be relatively distinct or orthogonal to existing, traditional investment factors such as quality, size, etc, according to Harbor.
“At Harbor, we believe culture matters. It is often claimed that people are a company’s most important asset, yet tangible measures of corporate culture and employee well-being are not captured on companies’ balance sheets,” Harbor said. “Utilizing the latest behavioral economic research, Irrational Capital has uncovered what they believe to be a direct systematic link between company culture and resulting company equity performance – The Human Capital Factor.”
HAPS is a part of Harbor’s growing HAP- series. The Human Capital Factor first became publicly investable through the Harbor Corporate Culture Leaders ETF (HAPY), which launched in February 2022, followed by the Harbor Corporate Culture ETF (HAPI), which launched in November 2022.
HAPY, HAPI, and HAPS use the same methodology to score companies on human capital – notably by combining systematic research to generate returns through statistical correlations between specific cultural characteristics and equity performance.
The primary differences between HAPS and its sister strategies relate to index construction and resulting market capitalization. HAPS strives for a beta of 1 to the Russell 2000 Index (while HAPI aims for a beta of 1 to the Russell 1000 Index), offers a sector-neutral approach (versus unconstrained for HAPY), and security representation within sectors being based on the highest HCF scores (all three), Harbor said.
HAPS seeks to provide investment results that correspond, before fees and expenses, to the performance of the CIBC Human Capital Factor Small Cap Index. The index consists of a modified cap-weighted portfolio of equity securities of approximately 200 U.S. companies identified by Irrational Capital as those it believes to possess strong corporate culture based on its proprietary scoring methodology. The index was developed by the Canadian Imperial Bank of Commerce (CIBC).
HAPS can be used in portfolios in several ways, including as a core small-cap U.S. equity holding enhanced by the Human Capital Factor. HAPS can also serve as a portfolio diversifier, offering uncorrelated to other investment styles. The fund also fits as a socially conscious strategy for accessing companies with strong corporate cultures.
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