ETFs for socially responsible investing
Investing is no longer merely about making money from stocks, bonds, or other assets. It's also about investing in issues that matter, such as environmental protection, human rights, diversity, and gender equality. Socially responsible investing (SRI) refers to investing in companies that have a positive impact on society and the environment. To achieve this goal, investors can use exchange-traded funds (ETFs), which offer a diversified and cost-effective way to invest in SRI.
In this article, we'll explore the various ETFs available for socially responsible investing, their characteristics, advantages, and drawbacks, and how to choose the right ETFs for your investment goals.
What are ETFs for SRI?
ETFs are mutual funds that track a stock or bond index, but trade like a stock on exchanges. ETFs are popular due to their low costs, diversification, transparency, and tax efficiency. ETFs can be used to invest in various markets, including SRI.
ETFs for SRI differ from traditional ETFs in that they focus on companies that meet certain social and environmental criteria. These criteria can vary depending on the ETF, but they usually include factors such as carbon footprint, labor practices, gender diversity, human rights, and governance.
Why invest in SRI ETFs?
Investing in SRI ETFs can provide several benefits to investors. Here are some of the main reasons to consider SRI ETFs:
1. Align your values with your investments: SRI ETFs allow you to invest in companies that align with your values and beliefs. You can avoid investing in companies that engage in practices that you find objectionable, such as polluting the environment, exploiting workers, or violating human rights.
2. Promote positive change: By investing in companies that have a positive impact on society and the environment, you can help promote positive change in the world. Your investment can support companies that are working on solutions to global challenges, such as climate change, poverty, or inequality.
3. Outperform traditional investments: SRI ETFs have been shown to perform as well as, and sometimes better than, traditional investments. This is because companies that meet SRI criteria are often well-managed, innovative, and forward-thinking, which can lead to improved financial performance.
4. Diversification: SRI ETFs offer diversification benefits, as they invest in a broad range of companies and industries. This can reduce the risk of a single company or market affecting your returns.
Types of SRI ETFs
There are several types of SRI ETFs available, each with its own approach and focus. Here are some of the main types of SRI ETFs:
1. Thematic ETFs: These ETFs invest in companies that focus on a specific social or environmental theme, such as renewable energy, water, or healthcare. Thematic ETFs are usually narrow in scope and may have a higher degree of volatility than other ETFs.
2. Inclusionary ETFs: These ETFs invest in companies that meet certain SRI criteria, such as having a low carbon footprint, promoting diversity, or respecting human rights. Inclusionary ETFs usually have a broader focus than thematic ETFs and can offer a more diversified portfolio.
3. Exclusionary ETFs: These ETFs avoid companies that engage in specific practices that are deemed harmful to society and the environment, such as tobacco, firearms, or fossil fuels. Exclusionary ETFs can provide a clear and simple way to invest in SRI, but they may have a narrower focus than other ETFs.
4. Impact ETFs: These ETFs invest in companies that have a measurable and positive impact on society and the environment, such as providing affordable housing, improving healthcare, or supporting education. Impact ETFs can provide a high degree of social and environmental impact, but they may have a higher expense ratio than other ETFs.
Choosing the Right SRI ETFs
Choosing the right SRI ETFs involves several factors. Here are some key considerations when selecting SRI ETFs:
1. Investment goals: Consider your investment goals, time horizon, and risk tolerance. Determine what level of SRI you want to achieve, and how much risk you're willing to take.
2. SRI criteria: Look at the SRI criteria of the ETFs you're considering. Ensure they align with your values and beliefs. Research the methodology and transparency of the ETFs to ensure they meet your standards.
3. Fees and expenses: Look at the expenses of the ETF, including the expense ratio, trading costs, and management fees. Ensure the fees are reasonable and compare them to other similar ETFs.
4. Performance: Look at the historical performance of the ETF to determine how well it has performed against its benchmark. Look at the volatility and risk of the ETF to ensure it meets your investment goals.
5. Diversification: Look at the holdings of the ETF to ensure they offer diversification benefits. Ensure the ETF invests in a broad range of companies and industries, and that it's not too concentrated on one sector or market.
Some of the most popular SRI ETFs include iShares MSCI KLD 400 Social ETF, Vanguard FTSE Social Index Fund, and SPDR S&P 500 Fossil Fuel Free ETF, among others.
Conclusion
Socially responsible investing is becoming increasingly popular, as investors seek to align their values with their investments. ETFs offer a diversified and cost-effective way to invest in SRI, and there are several types of SRI ETFs available. Choosing the right SRI ETFs involves considering several factors, including investment goals, SRI criteria, fees and expenses, performance, and diversification. By investing in SRI ETFs, you can support positive change in the world while achieving your investment goals.