by Aaron Levitt | March 21, 2014 11:40 am
There’s a powerful trend emerging in the world of crafting portfolios. Investors are now building portfolios based on their morals and values. Dubbed “social responsible investing” or SRI, these investors essentially add several screens to shift through various stocks in order to comply with various environmental, social and governance (ESG) requirements.
The hope is that the underlying SRI portfolio will produce a strong financial return as well as a good social one. And those returns have been getting much much better.
Socially responsible investing used to be considered the whipping boy in terms of total returns, often falling behind broad indexes and “sin” related industries like tobacco, booze and gambling. However, with major pensions and sovereign wealth funds now using their immense size to influence management on ESG policies, SRI returns have improved.
According to Goldman Sachs (GS), firms that are considered to be leaders in socially responsible investing have also been leaders in terms of stock performance as well — averaging an extra 25% over the longer term. This echoes similar research conducted by Allianz. Between 2006 and 2010, the German insurance group found that investors could have added an additional 1.6% a year to their investment returns by allocating to portfolios that invest in companies with above-average ESG ratings.
The bottom line is that investors no longer have to sacrifice their morals when looking for investment returns. Here are five of the easiest ways to a dash of ESG and socially responsible investing to your portfolio.
For investors looking for an easy way to add a dash of socially responsible investing to their portfolio, the iShares MSCI KLD 400 Social (DSI) should be their first stop.
The ETF’s underlying index tracks 99% of all the stocks in the United States. That includes large- mid- and small-cap firms. First, index provider MSCI kicks out all tobacco, gambling, firearms/weapons, nuclear power, adult entertainment and GMO seed producers in the USA Investable Market Index. It then uses various socially responsible investing screens to weight DSI’s holdings and create its underlying portfolio.
The SRI ETF currently tracks 400 different firms and charges just 0.50% — or $50 per $10,000 — in expenses.
And while the removal of those various “sin” industries may at first blush seem like a drag on DSI’s performance, it has actually been the opposite. The socially responsible investment managed to post a 35.5% return in 2013 — besting the venerable S&P 500. Over the last five years, that outperformance has continued.
Overall, DSI proves that investors looking at socially responsible investing don’t have to sacrifice returns for their morals.
For those investors wanted to eliminate the volatility of owning smaller firms from their portfolios, the iShares MSCI USA ESG Select ETF (KLD) is a solid choice.
The $250 million KLD tracks U.S. large- and mid-cap stocks screened for positive socially responsible investing characteristics and excludes tobacco companies. Index provider MSCI first looks at its broad MSCI USA index — which contains about 250 stocks. The indexer then applies a standard set of criteria to weight each stock, and those with stronger weights get more prominent placement in the new SRI index. That produces a portfolio of 107 different stocks — with top holdings in Apple (AAPL) and renewable energy-focused utility NextEra Energy (NEE).
Overall, technology and financial firms make up the bulk of KLD’s holdings.
Returns for the socially responsible investing fund have been pretty strong. KLD managed to post a nearly 31% total return in 2013. While that did underperform the broad S&P 500, KLD has beaten the benchmark index over the past five years.
Like its sister fund DSI, expenses for KLD run just 0.5%.
While most social responsible managers tend to focus on a variety of ESG screens, a common theme is environmental issues and how firms react to the concept of sustainability. The often ignored Huntington EcoLogical Strategy ETF (HECO) taps into the various firms making efforts on this front.
However, this is not an ETF of solar and wind power producers.
Sponsor Huntington Bancshares (HBAN) defines “ecologically focused companies” as firms that have positioned their businesses to respond to increased environmental legislation, cultural shifts toward environmentally conscious consumption and capital investments in environmentally oriented projects.
The actively managed fund picks out what the managers believe are the best targets in the previously mentioned MSCI KLD 400 Social Index. Currently, the fund holds 56 different firms including Starbucks (SBUX) and chipmaker Texas Instruments (TXN).
That active focus has produced some hefty returns as well.
HECO managed to return nearly 30% in 2013 and is up nearly 4% year-to-date. Expenses for the ETF are bit on the high side, however, currently at 0.95%.
While the previous three SRI ETFs track big passive indexes, AdvisorShares Global Echo ETF (GIVE) is a little bit different.
The fund is actively managed as a “core” solution, meaning it holds both stocks as well as fixed income instruments and bonds. All of these holdings are scrutinized for various socially responsible investing and ESG requirements before being added to GIVE’s underlying portfolio. However, since it is actively managed, these holdings can and do change on a daily basis. The ETF also holds a nearly 4.2% weighting in the previously mentioned DSI ETF.
Here’s where GIVE gets interesting.
The ETF charges a monster 1.61% in expenses. However, 0.40% of that is donated to Philippe Cousteau Jr.’s — Jacques Cousteau’s grandson — Global Echo Foundation. The foundation’s mission is to provide funding solutions “to many of the challenges facing the world community from social issues impacting women and children to environmental conservation.”
Unfortunately, that hasn’t done much to bring investors to the fund, as GIVE has only attracted around$9 million in assets so far. Most likely, because investors in the SRI ETF don’t actually get claim that tax-deduction from the donation.
The newest entrant into the socially responsible investing world is the ALPS Workplace Equality ETF (EQLT).
The premise of EQLT is to focus on “America’s leading equality-minded corporations.” Meaning EQLT will track those firms that provide support and benefits to their lesbian, gay, bisexual and transgender (LGBT) employees.
EQLT uses the Human Rights Campaign Corporate Equality Index and only selects stocks that score 100% in the metric. The metric basically looks at a firms hiring practices and whether or not they provide healthcare and other benefits to same-sex partners or spouses. Currently, EQLT has around 162 different holdings.
However, the kicker for EQLT is that many of its holdings — like spirits maker Brown-Forman (BF.B) or casino operator Caesars (CZR) — aren’t necessarily typical ESG fair. That could turn off some investors looking at EQLT for socially responsible investing. Another potential problem for the new fund is its hefty 0.75% expense ratio.
The space is still pretty new, so the choices are a bit limited, but if you’re interested in socially responsible investing, these funds are your best bets.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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