"We identified a long-term trend toward out-performance of companies relative to their respective sector peers after adopting LGBT-inclusive workplace policies."

--John Roberts, fund manager of Denver Investments

These words from the creator and manager of the Workplace Equality Index -- as well as the Workplace Equality ETF (NYSEMKT:EQLT), which tracks the index -- show the main investing thesis behind this collection of companies. Roberts and his team use their own research, as well as research from the Human Rights Campaign (HRC), to find companies that support workplace equality among lesbian, gay, bisexual, and transgender (LGBT) employees. American Airlines, Nike, and Yahoo! are among the notable holdings in the fund. But this index is by no means a charity case, and in fact you'll soon see how this fund is significantly outperforming the market.

Creating the index and ETF
The Kevin J. Mossier Foundation -- the foundation of the late American entrepreneur Kevin Mossier, who was responsible for creating the modern-day LGBT travel industry -- sought out Denver Investments in 1998 to manage the assets Mossier left to the foundation, with the request that the funds be invested only in LGBT-friendly companies. In the 1990s, very few resources existed for measuring a company's degree of workplace equality, other than cold-calling the companies and asking their policies. That is what John Roberts and his team did to create the index nearly 20 years ago.

Thanks to the Human Rights Campaign's Corporate Equality Index, this is now much easier. To score well on HRC's list, companies' Equal Employment Opportunity statement must prohibit discrimination based on sexual orientation and gender identity, and the company must provide health benefits to same-sex partners or spouses of employees, along with other benefits. To be listed in the Workplace Equality index, companies must now score 100% on HRC's list.

While the Workplace Equality Index itself is a non-managed list of companies that met these criteria, Denver Investments recently started the Workplace Equality ETF to allow investors a way to put their money into a managed ETF based on Denver Investments' research. While the Workplace Equality ETF is the first fund of its kind, this niche is getting more attention lately. CreditSuisse has put out its own LGBT index, and Galileo Capital Management has launched LGBT Capital, an asset management firm focused on impact investment in the LGBT arena.

How LGBT equality can mean good business
While some might mistakenly consider the Workplace Equality Index to be a charitable cause, don't be fooled. This collection of LGBT-friendly stocks has handily beaten the market over the last 10 years, and it gives us plenty of reason to expect similar outperformance in the future. Over the 10-year period ended Sept. 30, the Workplace Equality Index has beaten the S&P 500 by 2.6 percentage points, bringing in annualized gains of 10.7% versus the broad-market index's 8.1%.

Eqlt Performance

Source: WorkplaceEqualityIndex.com.

Chicken or the egg?
We have to make sure we're understanding causality here. Are these companies performing better because they have the sort of corporate culture that supports workplace equality, or do large, diverse companies that are already excelling naturally begin to adopt policies that foster workplace equality?

Here are a few graphs to support that companies with LGBT-friendly policies actually do perform better after adopting these policies. The below graphs show how the companies in the index, on average, perform during the years leading up to their inclusion in the index and after.

Eqlt Before And After Chart

Source: WorkplaceEqualityIndex.com.

Eqlt Before And After Chart

Source: WorkplaceEqualityIndex.com.

But why is the fund lower than the market lately?
The performance for the fund in the last few months has been lower than the general market. The reason for that? Sector allocation. Because the index follows any company that meets the workplace equality measure, it does not discriminate by sector.

The fund's largest sectors are consumer discretionary, tech, and financials, while energy is severely under-weighted compared to the S&P 500. Because energy has done particularly well in the States in 2014, this EQLT fund has shown less growth than the market. But in years when tech and financials have led the market, the fund has beaten the S&P 500 by more than 2.5 percentage points.

Roberts says there's a lot of catching up to do in terms of workplace equality in sectors like energy. ExxonMobil, for example, is one of the lowest-ranking companies' on HRC's equality index.

Eqlt And Sp


Source: WorkplaceEqualityIndex.com.

Is there much of a future in this type of investment?
Talking with founder John Roberts, I asked whether there is much of a future for the Workplace Equality ETF, or whether so many companies will meet the criteria in the coming years that the index will average out with the S&P 500. Robert said he would be happy if there were no need for a fund like this in the next decade or two, but he also noted that only 165 companies currently make the cut and that many have a long way to go. Therefore this list of LGBT-friendly companies is likely to continue beating the market for the foreseeable future. 

Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Nike and Yahoo. The Motley Fool owns shares of Nike and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.