The Rise of Socially Responsible ETF’s
A quick google search is all that is needed to pull up hundreds of articles bemoaning millennials and how they handle their money. The topics range from the amount of cash spent on avocado toast, to the mountains of student debt they carry. In general, it is safe to say that millennials look at money differently than any generation before them. That uniqueness also extends to their investment portfolios.
Morgan Stanley’s Institute for Sustainable Investing found investors in their 20’s and 30’s are more than twice as likely to focus on green investments. That means that in addition to traditional metrics used to evaluate investments millennials are also considering the business practices of the companies they invest in. Socially responsible investments place restrictions on the types of companies that are including in an effort to weed out companies that are bad for the environment, lack a positive inclusive culture, etc. In the words, for the first time, investors are starting to care about a company’s heart, not just its wallet.
Coinciding with the growth in this types of investments is the continued boom in the passive investing world. Exchange traded funds (ETFs) continue to see massive inflows as investors seek diversified funds with low expenses. While ETFs are growing in popularity with almost every group of investors, millennials in particular have been drawn to them.
With both trends rising in popularity it was only a matter of time before they combined to create a new industry for socially responsible, green or ESG ETFs. ESG stands from environment, society, and governance, and it forms the baseline requirements for a company to be considered for inclusion in an ETF. The options for ESG ETFs were limited for many years but as popularity has grown fund companies have answered the call by providing hundreds of options for investors to choose from.
The most common area of focus for ESG ETFs is in the environmental side. Funds like the iShares AWCI Low Carbon Target ETF (CRBN) that highlights companies that make an effort to minimize their carbon footprint. These funds offer a collection of companies that reflect the goal of environmental sustainability.
Another area of focus is on diversity and inclusion. the SPDR SSGA Gender Diversity Index ETF (SHE) places a large weight on investing in companies that are women owned and women governed.
By 2020 there are ETF's available to match almost any investors code of ethics. They offer baskets of securities tied to a common goal. There are however potential downsides. Because of the common goal some ESG ETFs offer lower diversification than traditional indexes. They also can come with a higher price tag in the form of an annual expense ratio.
The overall takeaway here is that If an investor has a desire to invest their dollars in these types of ETFs they will need to do some extra homework to ensure they are keeping their costs down, and building a fully diversified portfolio. They may also need to look closer at the underlying stocks in the ETF to make sure that the mandate of the chosen ETF matches their personal convictions and they are not inadvertently buying stock in companies they do not agree with.