I’m finally going to invest in something! And I actually kind of understand it!
If you read my post about my attempt to invest in index mutual funds, you’ll know that I failed miserably and decided to focus on index exchange-traded funds (ETFs) instead.
I started out by using AAII’s ETF Screener, and I selected “Yes” for socially responsible and index fund to make sure I was starting off with a narrow enough field.
The hardest part of investing in funds of any kind is not knowing exactly what you’re investing in, since most funds just reveal their top 10 holdings. Thankfully in an article on Vox—sent to me by our lovely managing editor Jean Henrich—I found a website called As You Sow that screens funds for actual environmental, social and governmental (ESG) compatibility.
So, I tested out a few tickers in one of As You Sow’s searches to see if the ETFs I was interested in actually fit my values and intentions for the earth. Spoiler alert: Most of them didn’t!
With these searches, no matter which one you use the results are broken down by categories and each category is graded. Looking at the Ecofin Global Water ESG ETF (EBLU), I found that it grades highly in almost all of the categories, meaning that there are little to no investments in stocks of companies that are profiting from the fossil fuel industry, deforestation, gender inequality, sales of guns and military weapons, the prison industrial complex and tobacco.
What I like about this tool is that you can pick and choose what’s most important to you. Let’s say there’s a fund that has a lot of investments in tobacco, but you’re not as concerned about that. If the fund has a lower grade for tobacco, then you would still be comfortable investing in that fund—unless you’re Don Draper in the fourth season of Mad Men:
Tobacco production also requires a lot of natural resources and uses chemicals that create pollution and can cause health issues for people in areas where it’s processed, so I’m glad the Ecofin Global Water ESG ETF doesn’t invest in it! Next, I looked at the Global X CleanTech ETF (CTEC). It has grades of A for everything except gender equality for which it received a grade of D. Here’s the breakdown provided on the gender equality search:
It’s well-known that the tech industry is not favorable or welcoming toward women, or anyone who is not a white man, so I expected the gender equality grade to be lower for this ETF. If I decide to invest in this ETF, I will keep an eye on its gender equality grade to see if it improves at all.
One thing that’s difficult about investing in ESG funds is that their past performance is not always ideal. Using AAII’s ETF Compare tool, I looked at how these two ETFs stacked up:
Ecofin Global Water has been around for almost five years, and has a mix of return grades, but Global X CleanTech has only been around for about a year so there isn’t as much return history to compare. (Two-thirds of all stock ETFs designated by Morningstar as being “socially responsible” are less than three years old.)
The return grades shown above are based on the ETF category average and comparing to category peers is key to understanding fund performance. Ecofin Global Water has a more favorable expense ratio and grade compared to its category average, but also has a grade of F for its category risk index—defined as the relative measure of risk by comparing the variation in total return for a fund over the last three years to the typical variation in return for all funds in its category. In other words, it’s a lot more volatile. So Ecofin Global Water might experience big price swings, but it is a relatively new ETF so it’s going to be a slight risk no matter what.
If I had to choose between these two ETFs, I would choose Ecofin Global Water because of its expense ratio and high ESG grades in all categories.
Have you tried searching for ESG funds? If so, what barriers did you run into?
Hi, Anine! Even though I shared that Vox article with you a while ago, I wasn’t inspired to search for ESG ETFs until recently. I played with the ESG screen on AAII’s website to find possible choices, and cross-checked them at As You Sow. The biggest roadblock I came across was hitting on funds that held only large familiar companies where it’s impossible to tell what they are actually doing to further socially conscious goals. And what’s the point in investing in a fund that has the same big companies that show up in lots of funds? So I ended up letting the list of holdings be the deciding factor. Of course, they all still had Tesla as a top holding! But when I saw a list populated with unfamiliar names that included the words solar or wind or ‘plug,’ that ETF made my cut!