I once met a guy who refused to invest. He didn’t want to own businesses that built missiles, hooked kids on cigarettes or extracted air-polluting fossil fuels. He met a financial advisor who offered a solution. He recommended a Socially Responsible fund. But its fees were high.
Fortunately, Socially Responsible (SRI) index funds exist. Most of them don't invest in industries that manufacture tobacco, alcoholic beverages, weapons or nuclear power. But that doesn’t make them perfect. After all, your social values might differ your neighbour’s.
For example, Charles H. Hennekens and Felicita Andreotti reported in American Journal of Medicine that obesity may soon overcome smoking as the leading cause of preventative death in the United States. According to the Harvard T.H. Chan School of Public Health, people who drink 1-2 cans of sugary drinks per day increase their odds of developing Type 2 diabetes by 26 percent. A two-decade study following 40,000 men found that those who drank just one can of soda per day had a 20 percent higher chance of dying from a heart attack, compared to men who rarely consume such drinks.
That doesn’t include the carnage caused by fast food. Yet, SRI funds don’t typically exclude Coca Cola, Pepsi, McDonald’s or other fast-food restaurant chains.
Such funds won’t align with everybody’s values. But for many, they offer a step in the right direction. What’s more, according to a research paper by RBC Global Asset Management, investors might not have to sacrifice performance for their ethics. The FTSE KLD 400 Index tracks the performance of socially responsible U.S. stocks. From April 1990 to April 2012, it beat the S&P 500.
Vanguard’s FTSE Social Index Fund Investors Shares (VFTSX) costs 0.22 percent per year. The fund’s holdings are screened for social, human rights and environmental criteria. It excludes companies involved with weapons, tobacco, gambling, alcohol, adult entertainment and nuclear power. It also has low exposure to oil and gas companies. It beat Vanguard’s S&P 500 Index (VFINX) over the past one-year, three-year, and five-year periods ending October 18, 2017.
That doesn’t mean it’s going to keep winning. But if it helps you sleep at night, it’s not a bad choice.
Vanguard’s - FTSE Social Index Fund Investors Shares (VFTSX) vs. Vanguard’s S&P 500 (VFINX)
Ending October 18, 2017
|Average Compound Annual Return||1-Year||3-Year||5-Year||10-Year||15-Year|
|Vanguard FTSE Social Index (VFTSX)||24.02%||13.79%||15.88%||7.37%||8.82%|
|Vanguard S&P 500 (VFINX)||22.03%||12.93%||14.16%||7.40%||9.44%|
Vanguard doesn’t offer an international SRI index fund. But Fidelity created one in May. Fidelity’s International Sustainability Index Fund (FNIYX) costs 0.30 percent per year. The firm’s U.S. Sustainability Index Fund (FENSX) costs 0.21 percent.
Investors shouldn’t try to guess which fund will win. Instead, SRI investors should own a piece of both. For added stability, they should also add a bond market index. I’ve included sample portfolios below. They represent different tolerances for risk.
After all, diversification might also help you sleep well at night.
SRI Portfolios That Might Help You Sleep
|Fund Name||Fund Code||Expense Ratio||Conservative||Cautious||Balanced||Assertive||Aggressive|
|Vanguard’s FTSE Social Index Fund Investors Shares||VFTSX||0.22%||15%||25%||30%||40%||50%|
|or Fidelity U.S. Sustainability Index Fund||FENSX||0.21%|
|Fidelity International Sustainability Index Fund||FNIYX||0.30%||15%||20%||30%||35%||50%|
|Vanguard Short-Term Treasury Index||VFISX||0.20%||70%||55%||40%||25%||0%|
|or Vanguard’s Total Bond Market Index||VBMFX||0.15%|
|Sources: Morningstar.com; Fidelity.com - Note: The tables below show low-cost SRI portfolios for Canadians, British and Australian investors. If a specific, low-cost SRI fund doesn’t exist, I replaced it with a plain vanilla index fund or ETF.|
SRI Portfolios For Canadian Investors
|Fund Name||Fund Code||Expense ratio||Conservative||Cautious||Balanced||Assertive||Aggressive|
|iShares Canada Jantzi Social Index ETF||XEN||0.50%||10%||15%||20%||25%||30%|
|iShares Core MSCI All Country World ex Canada Index ETF||XAW||0.22%||20%||30%||40%||50%||60%|
|Vanguard Canadian Aggregate Bond ETF||VAB||0.13%||70%||55%||40%||25%||10%|
|or Vanguard Canadian Short-Term Bond Index ETF||VSB||0.11%|
|Sources: Vanguard Canada; iShares Canada.|
SRI Portfolios For British Investors
|Fund Name||Fund Code||Expense ratio||Listed Currency||Conservative||Cautious||Balanced||Assertive||Aggressive|
|UBS MSCI United Kingdom IMI Socially Responsible ETF||UKSR||0.28%||GBP||15%||20%||30%||35%||45%|
|iShares Dow Jones Global Sustainability Screened ETF (Accumulating shares)||IGSG||0.60%||USD||15%||25%||30%||40%||45%|
|iShares UK Gilts 0-5yr ETF||IGLS||0.20%||GBP||70%||55%||40%||25%||10%|
|or Vanguard UK Gilt ETF||VGOV||0.12%||GBP|
|Source: UBS; iShares UK|
SRI Portfolios For Australian Investors
|Fund Name||ticker Symbol||Expense ratio||Listed Currency||Conservative||Cautious||Balanced||Assertive||Aggressive|
|The Russell Australian Investment ETF||RARI||0.28%||AUD||15%||20%||30%||35%||45%|
|Beta Shares Global Sustainability Leaders ETF||ETHI||0.59%||AUD||15%||25%||30%||40%||45%|
|Vanguard Australian Government Bond Index||VGB||0.20%||AUD||70%||55%||40%||25%||10%|
|Sources: Russell Investments; BetaShares Australia; Vanguard Australia|
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas