The team behind a group of exchange-traded funds focused on employee happiness doesn’t want you to get the wrong idea. Yes, it’s an investing thesis investors can feel good about: a screen for companies that treat their workers well. But the managers emphasize that there doesn’t need to be a hit to returns to invest in a socially responsible way. In fact, the team has found the opposite to be true. The Harbor Human Capital Factor U.S. Large Cap ETF — which fittingly trades under the HAPI ticker — has climbed nearly 25% this year as megacap technology stocks rallied. Meanwhile, the benchmark S & P 500 index has added less than 20% in the same period. “It’s a conceptual bridge that people need to get over,” said Kristof Gleich , chief investment officer of Harbor Capital Advisors. But once they do, it’s not a hard sell: “This appeals to my mom – my dear old mom – as much as it does a sophisticated institutional pension plan because it’s relatable,” Gleich said. “People understand: OK, if companies are doing a good job at engaging and motivating … that’s obviously going to result in better outcomes for the company, for the shareholders and for all the stakeholders.” HAPI .SPX YTD mountain HAPI vs. the S & P 500 in 2023 Morningstar has a bronze rating and put the ETF’s year-to-date performance in the top 6th percentile of nearly 1,400 large blend funds. HAPI has a fee of 0.36%. A strong year That marks a strong start for the fund, which launched in late 2022. The investing strategy behind it, meanwhile, has a longer history. Through working with data partners, Irrational Capital has surveyed more than 15 million employees across around 4,500 companies. In some instances, the firm has been gathering data about companies’ treatment of workers for more than a decade. A survey will ask workers about topics ranging from their level of pride in their work, if their ideas are valued and for their view of both direct and senior management. There’s typically interest from companies in participating because the data can be used by management for feedback without being publicly shared, according to Irrational founder David van Adelsberg. Executives don’t need to worry about Irrational misrepresenting their company, and participation can open them up to potential inclusion in products such as an ETF, van Adelsberg said. While he said data from internal human resource teams can be self-referential, this type of survey is viewed as more beneficial when trying to predict future equity performance. Survey results are then melded with publicly available data about companies to create a “score” around their human capital. This has been codified into a new investment factor that is considered uncorrelated to others, such as value or growth, van Adelsberg noted. From there, the Harbor ETF is built from companies that perform well in the human capital assessment. It is sector weighted to the S & P 500, with an individual limit of either five times the exposure in the broad index or 5% in net assets. Mega-cap stocks make up a sizable portion of the biggest holdings, which helps explain the outperformance this year thanks to the “Magnificent 7” rally . In fact, Microsoft , Apple , Nvidia , Alphabet (both A and C shares) and Meta together make up more than a quarter of individual stock holdings, according to Morningstar data as of Nov. 29. Outside of technology, health care stocks Eli Lilly and Johnson & Johnson and financial names Mastercard and Berkshire Hathaway are also among the largest holdings. J & J is the only one of the top 10 on track to end 2023 with losses. In total, the ETF recently held nearly 150 equities and is benchmarked to the CIBC Human Capital Index. Harbor runs a similar ETF, under the ticker HAPS , focused on small cap stocks that similarly builds on Irrational research. That fund includes stocks such as buy-now-pay-later fintech provider Affirm , human resources solutions company Insperity and investment firm Evercore . While small-cap securities have underperformed this year, Gleich said there could be an opportunity for investors to get in the fund before a rebound. The small-cap ETF has a fee of 0.64%. Many investors are “waiting on the sideline, and have been waiting on the sidelines to allocate more to small caps,” Gleich said. “Next year could be a year where small caps surprise to the upside more broadly, and obviously HAPS, then, would do very well in that environment.” ‘Novel approaches’ The team sees a moat around their data that allows investors to gauge human capital in a way no one else can. Gleich said Irrational’s data has “cracked the code” for investors looking to understand an intangible factor that has largely been overlooked. “It’s measuring an asset in a way that others can’t measure,” the former JPMorgan Chase managing director said. “We’re all about looking for novel approaches to investing that are measuring value in unique ways. And if you can do that, and if you can do it in a disciplined way, we think we can generate strong returns for our clients.” Still, the team noted some challenges in building broader awareness of what human capital is or why it matters. But they’ve said awareness begets interest in the product. Improved understanding can also come from the Securities and Exchange Commission’s draft recommendations on human capital disclosure requirements, van Adelsberg said. More human capital-focused products could be on the way as the investing framework gains favor, the pair said. And the Irrational Capital founder said there could also be a positive byproduct from their work as these efforts become more widely known. If executives see there’s a connection between strong equity performance and positive treatment of workers, he said they will act accordingly. In other words: the firm has found the business case for treating workers well. “In this market, what we’re seeing is that those companies who have strong human capital ratings are outperforming,” van Adelsberg said. “The role that human capital plays in driving future equity performance isn’t going down. It’s going up.”