Paul Tudor Jones: Can an ETF Save Capitalism?

Rising political tensions reflect tremendous wealth disparities, according to billionaire trader Paul Tudor Jones.

To ensure that these issues do not lead to calamity, Jones is urging companies to step up. He's also turned data on what companies are doing to address such concerns into an ETF, launched in partnership with Goldman Sachs, that adjusts its holdings yearly to reflect corporate behavior.

Speaking at the Inside ETFs conference Monday near Miami before several thousand advisors and investors — less than a year after the corporate behavior-focused Goldman Sachs JUST U.S. Large Cap Equity ETF began trading — Jones said, "I had no idea the ETF nation is so huge!"

The Just ETF, which he helped launch last summer, is "the story of capitalism and how it is floundering in its current form," Jones said of the fund's origins.

He highlighted the words of Adam Smith: "If justice is removed, the great, the immense fabric of human society … must in a moment crumble into atoms."

Today's climate is toxic. "Think of the income disparity we have today in the U.S. I have not seen this social divide since I was a kid in the '60s and '70s," he said.

Less than half of millennials view capitalism positively, according to Jones. "It's no surprise. Eighty-two percent of wealth last year went to the top 1%. This situation is not sustainable. Some experts say that such disparity will end in cataclysm."

He points to lower tax rates and the popular idea espoused by Milton Friedman as two culprits: "When Friedman said a corporation's social responsibility is to increase profits … it was like catnip" to the private sector.

Since the '70s, the bottom 90% of the public has lost about 12% of its wealth to the top 10%, leaving it with 23% of total U.S. wealth.

What to Do

To reverse this situation — for the good of the American public and capitalism – it's important to redefine corporate stakeholders, Jones said, so the group includes employees, the community in which it operates and the environment — not only shareholders.

"We must have a contract that builds trust," he explained. "Greater income disparity means more mistrust … as well as social unrest and unhappiness."

Jones also wants to "use capitalism itself" — which drives the bulk of the $19 trillion U.S. economy — to move forward.

"That's why I started Just Capital five years ago," he said. "Enlightened CEOs are not focused on short-termism."

The non-profit organization has surveyed 100,000 individuals in the U.S. over the past four years to gauge what they care about. "We believe in the democratic voice of the American public to get it right and are taking transparent data to drive positive action."

Its guiding principle is that companies prioritizing the same objectives as the public can help "make capitalism work for all," Jones said.

Fund Details

Just Capital puts firms in the Russell 1,000 under a microscope and ranks them in accordance with priorities uncovered by its polls. The top 50% of firms in 33 sectors are included in its index, which is re-weighted each year.

Jones' partners at Just Capital include Deepak Chopra and Arianna Huffington.

"We launched on June 17," he said. "It was the largest launch in the ESG space and among the top 10 ETF launches ever." The fund now has about $200 million in assets.

The non-profit does not work with "negative screens," but it does analyze companies using about 75 metrics, such as living-wage policies.

"Some firms we include [in our ETF] might not make it by some [environmental, social and governance] standards," he added, depending on factors like their fossil fuel use.

"But as we drive capital to them, we hope to change their behavior and move them to a place that is more in sync with what the American public wants," Jones explained.

He says the ETF's performance has topped the Russell 1000 Index by 3.4% over the past year or so. "If you treat your employees well, they will make you a great product" or service, Jones said. "Our companies pay 7% more than firms in the bottom half of the Russell 1000."

Turning back to the political system, the trader said this is "the least efficient way" to affect change. "Most politicians do not have a good understanding of private sector. We need to change it from within."

When asked how Just Capital communicates with companies in the Russell 1000, the trader said his organization reaches out to them regularly about its data and metrics. "We now have about 550 and counting on our portal. We are starting to have an impact," he said.

"This will take time," Jones acknowledged. "But … I see a business case where doing this means everyone wins. I invite you to join us on the journey to a more just marketplace of, by and for the people."

— Check out Paul Tudor Jones Says Next US Recession Will Be 'Frightening' on ThinkAdvisor.