If there is one thing we could take away from the 2016 presidential election, it is that we are more divided than ever. The causes you care about get thrown around in the news left and right. You might be marching, calling your state senator, donating your money, or simply getting depressed. I thought this might be a good time to discuss another alternative to making your voice heard: investing your money.
Socially responsible investing (SRI), also known as sustainable, socially conscious, "green" or ethical investing, is any strategy which seeks to consider both financial return and social good to bring about a social change. Some of these strategies look to promote those companies related to the environment, consumer protection, human rights, and diversity. Some businesses that may be avoided are those involved in alcohol, tobacco, fast food, gambling, pornography, weapons, abortion, fossil fuel, or the military.
While these SRI strategies get the most press, it should be noted that these definitions might be considered more "liberal." What is "responsible" or "ethical" also surely depends on who you ask.
Those that are more conservative-minded may look at that list and want to invest in the exluded companies instead, such as a gun owner who wants to buy stock in Smith & Wesson. The businesses that "socially responsible investors" typically want to avoid are referred to as "The Sin Bin."
In a moment, I'll look to give you some guidance whether you are liberal or conservative. First, let's discuss why your investable dollars might have an impact.
How Investing Works
When you buy a share in a company like Microsoft, you are paying $69 to own a very small percentage of the company (0.000000001%, roughly). When Microsoft returns a profit, you may receive some of that profit in the form of the dividend. If they begin to beat expectations, other investors may be willing to pay $70 for the right to own that share. That makes you money. When there are more buyers than sellers, the price of the stock will go up.
As share prices rise, Microsoft becomes more valuable as a company. They go from being worth $1 billion, to $100 billion, to their current market cap of $479 billion. This gives them more leverage. They can reinvest their profits to expand their business, obtain bank loans at very low interest rates, or issue more shares of stock to raise additional capital.
As share prices fall, Microsoft won't have as many of those luxuries. Creditors may become worried about the stability of the company. Since acquiring a business typically means issuing shares of stock to the small business owner, they may not find that to be as valuable as a share in, say, Apple. In today's world, this might look like J.C. Penney.
Thus, by buying a share of Microsoft, you are hoping that their "special sauce" will bring you profits in the future. You are also giving a vote of confidence to the C-Suite by holding on through thick and thin while they run the business.
Should I Be An Active Investor?
If you have been reading this blog, you know that for most people, I recommend a passive investing strategy. This means buying low-cost ETFs and mutual funds that will bring you exposure to large, small, domestic and international companies.
It does not mean picking Pepsi over Coke, picking health care over technology, or picking Europe over the United States. A passive strategy will ensure you hit your long-term savings goals by being diversified.
Having said that, there is something to be said about being engaged with your investments. If you are having a hard time motivating yourself to save and invest because it seems boring, taking an active approach would be preferred to not investing at all. Whether you would achieve greater returns or losses is debatable.
There are many ways to customize your portfolio. If you are purchasing large mutual funds that exclude one small sector, such as weapons, you could get away with having this eat a larger portion of your portfolio. However, if you are choosing to strictly invest in individual solar energy companies for example, I might encourage keeping it to just 5% of the overall portfolio.
One last note here: you should consider which accounts you will use for your active investment strategies. Most will want to leave their retirement accounts alone. Others that are at certain ages, income and net worth levels may find it more advantageous from a tax standpoint to use their IRAs for alternative investment strategies. Consult your advisor for further consultation.
Now, let's talk about your active options for investing. Let me be clear: there are various iterations as to what it means to be socially responsible, or "sinful." After this election, you already know that being liberal or conservative isn't black or white. I don't mean to simplify your choices here, but I certainly can't cover every philosophy. With that, let's dive in.
Socially Responsible Investing
In recent past, I would have been hard pressed to recommend a SRI strategy. With few mutual funds participating in the space, expense ratios were well over 1% while performance was very volatile. As the space has matured, fees have gone down while performance has tracked closer to equity benchmarks.
Morningstar, essentially the Wikipedia for investment research, has started rating how well mutual funds are managing the environmental, social, and governance (or ESG) investing factors relevant to their industries. These go for mutual funds that may not even be marketing themselves as socially responsible.
For some ideas, check out the following:
VFTSX- This is a broad fund from Vanguard that tracks US companies that rate highly on social, human rights, and envrionmental criteria with just a 0.22% expense ratio. Its largest holdings include Apple, Microsoft, and Alphabet.
FSLEX- For those looking for an alternative energy fund, Fidelity's seeks to invest in companies principally related to renewable energy, energy efficiency, pollution control, water infrastructure, and waste and recycling technologies.
SHE- This fund from SPDR tracks US companies that are leaders in gender diversity. At just a 0.20% expense ratio, it's largest holdings include Pfizer, Pepsi, Amgen, 3M and Mastercard.
CATH- This fund picks companies within the S&P 500 whose business practices adhere to the Socially Responsible Investment Guidelines as outlined by the United States Conference of Catholic Bishops (USCCB) and excludes those that do not. Its largest holdings are Apple, Microsoft, Exxon Mobil and Amazon.
TAN- Guggenheim Solar ETF
FAN- First Trust Global Wind Energy
MPCT- iShares MSCI Global Impact ETF
Parnassus and Calvert are also well known for their extensive socially responsible mutual funds.
There are a whole host of options. For even more options, see this list from Schwab which outlines several kinds of ETFs available. Here at First National Corporation, we have created a broad, low-cost SRI strategy with funds I have not mentioned here. Feel free to contact me if interested in employing an SRI strategy.
The Sin Bin
After reading the above section, you may be taking a contrarian view. You may think that these businesses are constraining themselves unnecessarily. In order to be environmentally friendly or more diverse, there could be an extra cost that eats away at profits. It may also be reasonable to think that these companies won't do well under President Trump.
Since there is a negative stigma with these companies, some investors find "sin stocks" as being too risky. This is in part due to the threat of litigation (think tobacco, casinos). However, that risk may mean you can find value here. As Warren Buffet commonly says, "be fearful when others are greedy, and greedy when others are fearful."
Unfortunately, this space is simply not as developed. I really can't recommend a fund like VICEX, which is the most prominent name in the space. While holding companies like Altria, MGM Resorts International, and Philip Morris, the expense ratio of 1.48%. This is far too expensive and its performance is lacking because of this.
One moderately acceptable option could be Fidelity's Select Consumer Staples fund (FDFAX), whose top two holdings of British American Tobacco and Philip Morris make up 20% of the portfolio. The expense ratio is much more reasonable at 0.76%, but this probably isn't what you're looking for.
Instead, you'll have to do a bit more work here:
-When investing in guns, tobacco, casinos, alcohol, or fast food, your best bet would be to own the largest two or three companies in those spaces. The energy sector could be held through ETFs such as JHME or RYE.
-If you think Russia's economy will have better performance under a Trump presidency, you may want to buy the broad Russia index RSX. I recommended this ETF back in December of 2014 when oil crashed, and the ETF is up 45% since then.
-If you think the Trump tax plan will provide the wealthy with more money to spend on luxury goods, you could consider a high-end company such as Coach.
-Finally, if you simply think that volatility is on the rise in 2017, the virtual currency Bitcoin could be an option through the Bitcoin Investment Trust, though the expense ratio is an astronomical 2%. Buying funds associated with the VIX may also allow you to make money on volatility.
The Bottom Line
In summary, proceed cautiously. I would hate to see you put a majority of your assets into any of the strategies outlined above. This post is meant to help you get creative, but only for a small portion of your assets. Find a company or area that speaks to your values and support it through a thoughtful investing strategy.