A Financial Advisor’s Top Socially Responsible ETFs
Once considered a “feel good” investment strategy, socially responsible investing (SRI) is now at the forefront of investing. There are several methods investors use when practicing SRI. Many investors will tailor their SRI decisions to their beliefs, including looking for investments that promote environmental, social or governance (ESG) factors, impact, or sustainability.
Socially Responsible Investing Statistics
Consider the following statistics that illustrate the growth of SRI investing:
- In 2016, SRI/ESG made up over 20% of the $40 trillion money management market
- Companies that deploy ESG strategies tend to show higher return potential, and are valued at a premium when compared to their peers
- Companies with higher ESG ratings tend to show higher profitability and dividend yield
- Most corporate executives believe that a sustainable strategy is needed to remain competitive
Corporations that don’t have strong corporate social responsibility (CSR) mandates that address ESG factors may be deemed riskier investments by investors. As a result, many corporations are responding to the demands of ESG investors.
An increase in CSR leads to an increase in SRI options so that now, investors can buy stocks, bonds, or mutual funds that fall under the SRI umbrella. Two other popular SRI methods involve the use of Exchange Traded Funds (ETFs):
- Using sustainability indexing to pick ETFs that are more sustainable than their peer group
- Actively eliminate ETFs based on an investor’s ethics, or ethical investing
Sustainability indexing is an effective SRI method. Using it has obvious pitfalls, like the potential for holding shares in companies that are not in-line with an investor’s ethical values. However, there are some not-so-obvious benefits. When compared to their peers, some of these ETFs have lower expense ratios, higher assets under management (AUM) (i.e. liquidity), and/or higher sustainability rankings.
There are many SRI-based ETFs to draw from. The list below represents, for the most part, highly-rated sustainable indexed ETFs as of June 15, 2018. These ETFs focus on various market segments.
Large Blend ETFs
Name: Schwab US Large-Cap Value ETF
Ticker: SCHV
AUM: $4.4 billion
Expense Ratio: 0.04%
Likes: Low cost; liquidity; long track record; top holdings have high sustainability mandates.
Dislikes: No sustainability mandate; controversial holdings against SRI; voting control remains with Schwab who defaults to portfolio company’s board for environmental and social proposals.
Large Dividend ETFs
Name: Vanguard Dividend Appreciation ETF
Ticker: VIG
AUM: $28.3 billion
Expense Ratio: 0.08%
Likes: Low cost; liquidity; long track record; top holdings have high sustainability measures; case-by-case voting on corporate and social policy issues.
Dislikes: No sustainability mandate; controversial holdings against SRI; voting control remains with Vanguard and may default to portfolio company’s board for environmental and social proposals.
Name: Schwab US Dividend Equity ETF
Ticker: SCHD
AUM: $7.7 billion
Expense Ratio: 0.07%
Likes: Low cost; liquidity, long track record; top holdings have high sustainability measures.
Dislikes: No sustainability mandate; controversial SRI holdings; voting control remains with Schwab and defaults to portfolio company’s board for environmental and social proposals.
Mid-Cap ETFs
Name: iShares Morningstar Mid-Cap ETF
Ticker: JKG
AUM: $920.7 million
Expense Ratio: 0.15%
Likes: Higher liquidity; long track record; strong corporate governance for voting with expectations that portfolio company will report on and will deal effectively with social, ethical, and environmental aspects of its business.
Dislikes: No sustainability mandate; higher cost; controversial holdings against SRI; voting control remains with Blackrock who votes based on their guidelines.
Name: Vanguard Mid-Cap Value ETF
Ticker: VOE
AUM: $9.1 billion
Expense Ratio: 0.07%
Likes: Low cost; liquidity; long track record; top holdings have high sustainability measures; case-by-case voting on corporate and social policy issues.
Dislikes: No sustainability mandate; controversial holdings against SRI; voting control remains with Vanguard and may default to portfolio company’s board for environmental and social proposals.
Small-Cap ETFs
Name: Vanguard Small-Cap ETF
Ticker: VB
AUM: $26.1 billion
Expense Ratio: 0.05%
Likes: Low cost; liquidity; long track record; top holdings have high sustainability measures; case-by-case voting on corporate and social policy issues.
Dislikes: No sustainability mandate; controversial holdings against SRI; voting control remains with Vanguard and may default to portfolio company’s board for environmental and social proposals.
Name: Vanguard Small-Cap Value ETF
Ticker: VBK
AUM: $26.1 billion
Expense Ratio: 0.05%
Likes: Low cost; liquidity; long track record; top holdings have high sustainability measures; case-by-case voting on corporate and social policy issues.
Dislikes: No sustainability mandate; controversial holdings against SRI; voting control remains with Vanguard and may default to portfolio company’s board for environmental and social proposals.
Large Foreign
Name: WisdomTree International Equity Fund
Ticker: DWM
AUM: $927.0 million
Expense Ratio: 0.48%
Likes: Higher liquidity; long track record; many holdings have high sustainability measures; third-party delegation to Mellon Capital who has sustainability and environmental proxy voting policies.
Dislikes: No sustainability mandate; higher cost; controversial holdings against SRI; voting control delegated to a Mellon Capital who may defer to portfolio company’s board in response to social proposals.
Emerging Markets
Name: WisdomTree Emerging Markets ex-State-Owned Enterprises Fund
Ticker: XSOE
AUM: $127.8 million
Expense Ratio: 0.32%
Likes: Many holdings have high sustainability measures; invests in emerging markets; third-party delegation to Mellon Capital who has sustainability and environmental proxy voting policies.
Dislikes: No sustainability mandate; higher cost; lower liquidity; short track record; controversial holdings against SRI; voting control delegated to a Mellon Capital who may defer to portfolio company’s board in response to social proposals.
SRI ETFs Reflect Your Values and Investment Strategy
There is currently no shortage of SRI ETFs, so the bigger issue is finding the SRI ETF funds that satisfy an investor’s ethics. Because many SRI ETFs invest in similar businesses, they are only differentiated by their track record, fees, and shareholder advocacy voting policies. An investor should see how the characteristics of a particular fund fit into their investment strategy and portfolio, but they should also consider whether or not they align with their personal values.
Individual investors should do their own research, and pay particular attention to the holdings in an SRI ETF. Many ETFs are invested in a large, diversified portfolio of companies and there isn't always strong oversight; even though it doesn't appear like it on the surface, it's possible that some of the holdings might go against their personal ethics.