Are Sustainable ETFs Better Than Mutual Funds?

Investing in Sustainable Companies with ETFs

Exchange Traded Funds (ETFs) are a collection of assets.  An Equity ETF, for example, holds a group of companies (stocks) in its portfolio.  When you invest in an ETF, you own a piece of every single company that is held in that fund. ETFs are a great vehicle for reducing risk, since you’re invested in a group of companies instead of a single company.

That also makes ETFs a great vehicle for voting with your dollars at scale, across many companies. This is an opportunity to have greater impact. Investors have caught on and are now demanding more socially responsible ETF options. Another thing that’s great about sustainable ETFs:  fund managers can use our collective voting power to encourage companies to align with our values. Companies love being included in ETFs since these vehicles bring capital, investor exposure and brand cache.

For example, the CEO of an up and coming sustainable ETF told us that they were going to meet with a large company to explain to them why the company didn’t make the cut to be included in their new women-focused ETF. While the would reconsider in 6 months, they simply didn’t qualify today because they did not meet the standards. You can see the power that socially responsible ETFs have in encouraging good change within companies.

Related content: Four Ways to Make Real Money with Sustainable Investing

Sustainable ETFs

There are 58 Sustainable ETFs currently on the market. 23 of them launched in the past year alone (as of September 9, 2017, source: http://www.etf.com/channels/socially-responsible)

So why consider ETFs? Let’s look at the benefits of ETFs over mutual funds.

Benefits of ETFs over Mutual Funds

1. Lower cost.

ETFs have a much lower expense ratio than mutual funds. The expense ratio is the annual fee that the fund company charges to run the fund. Let’s say you invest in a mutual fund with a 1% expense ratio. That means that you will be paying $10 for every $1,000 invested. The fee is taken from your investment in the fund, which means you don’t have to write a check – it is done automatically on your behalf. Expense ratios are also difficult to find – they are often buried in the fund prospectus. When investing in any type of fund (ETF or mutual fund), make sure you look at the expense ratio and performance first.

On average, ETF fees are 1/3 the price of a typical mutual fund. In addition, because they are following an index, their turnover is low (i.e. when companies come into / out of the ETF). That’s good news for investors. ETFs have ½ the tax cost of the average mutual fund. (source: www.ishares.com)

2. Potential for Higher returns

Many people wonder if ETFs outperform mutual funds. You’d think that mutual funds would have higher returns since they are actively managed and have higher expense ratios. As it turns out, mutual funds are often more expensive and have lower performance than ETFs.

Crazy, right? After subtracting fees, only 18% of active mutual fund managers beat their benchmark. ETFs are designed to mirror the holdings in their benchmark and therefore follow benchmark performance. The iShares Core ETFs have outperformed their mutual fund peers 84% of the time over the last 5 years

3. Greater buying, trading, and pricing flexibility.

Mutual funds are only priced once per day.  Which means you can only trade them once per day. ETFs, on the other hand, trade on an exchange just like a stock. That means you can trade them throughout the day, any time the exchange is open. This gives you, as an investor, greater flexibility, and control over the timing of your trades.

And because ETFs trade like stocks, you have the option to use stop and limit orders. Some ETFs even offer put and call options.

It seems investors are catching on to the benefits of ETFs v. mutual funds. ETFs are now a 3 trillion dollar industry.

Related Content: Start Impact Investing for $50

But Watch Out. Not all sustainable ETFs are equal.

We are in the early days of sustainable investing.

That means there is a huge variation in financial products. Both in ETFs and Mutual Funds. Some are doing deep integration of sustainability, while others are simply “box ticking.”

This is dangerous because it could reflect that sustainable investing is underperforming when it’s not.

The current state of sustainable investing is similar to that of cryptocurrency. Everyone knows Bitcoin and Ethereum. But there are 900 cryptocurrencies and most of them are crap. The bad ones will give cryptocurrency a bad name.

The same thing applies to sustainability investing. Truly integrated sustainable investing is not box-ticking, and it’s not simply screening to exclude bad stocks (e.g. tobacco, firearms, fossil fuels.)

That’s why some mutual funds might be worth the extra cost of active portfolio management, even though they might have a higher expense ratio.

Bottom line:  do your research. That means look at the constituents of the fund, the fund management team and the criteria used to include assets in the portfolio, in addition to performance over time and expense ratio.

A quick view of Socially Responsible ETFs

Following are the top 10 socially responsible ETFs, grouped by category.

Top 10 Socially Responsible ETFs by Expense Ratio

The expense ratio for the socially responsible funds ranges from 0.12% to 0.95%. Not bad. They are all under 1%. By comparison, mutual fund expense ratios range from .9% – 1.35%.

TICKER FUND NAME ISSUER EXPENSE RATIO Assets Under Management SPREAD% SEGMENT
SUSB iShares ESG 1-5 Year USD Corporate Bond ETF BlackRock 0.12% $10.06M 0.15% Fixed Income: U.S. – Corporate Investment Grade Short-Term
ESGU iShares MSCI USA ESG Optimized ETF BlackRock 0.15% $10.77M 0.16% Equity: U.S. – Total Market
SUSC iShares ESG USD Corporate Bond ETF BlackRock 0.18% $10.14M 0.17% Fixed Income: U.S. – Corporate Investment Grade
ESGD iShares MSCI EAFE ESG Optimized ETF BlackRock 0.20% $122.37M 0.06% Equity: Developed Markets Ex-U.S. – Total Market
EFAX SPDR MSCI EAFE Fossil Fuel Reserves Free ETF State Street Global Advisors 0.20% $41.63M 0.42% Equity: Developed Markets Ex-U.S. – Total Market
CRBN iShares MSCI ACWI Low Carbon Target ETF BlackRock 0.20% $439.49M 0.12% Equity: Global – Total Market
LOWC SPDR MSCI ACWI Low Carbon Target ETF State Street Global Advisors 0.20% $143.38M 0.15% Equity: Global – Total Market
SHE SPDR SSGA Gender Diversity Index ETF State Street Global Advisors 0.20% $329.37M 0.07% Equity: U.S. – Large Cap
SPYX SPDR S&P 500 Fossil Fuel Reserves Free ETF State Street Global Advisors 0.20% $170.40M 0.22% Equity: U.S. – Large Cap
ESGE iShares MSCI EM ESG Optimized ETF BlackRock 0.25% $96.47M 0.06% Equity: Emerging Markets – Total Market

Top 10 Socially Responsible ETFs by Performance

The top performing ETFs over the past year have returned investors 16.37 – 78.17%.

(source: ETF.com, data as of September 6, 2017)

TICKER FUND NAME 1 MONTH 3 MONTH 1 YEAR 5 YEAR
GRN iPath Global Carbon ETN 34.96% 34.90% 78.17% -5.45%
CXSE WisdomTree China ex-State-Owned Enterprises Fund 5.04% 15.93% 47.01%
QCLN First Trust NASDAQ Clean Edge Green Energy Index Fund -0.32% 5.02% 25.12% 16.23%
XSOE WisdomTree Emerging Markets ex-State-Owned Enterprises Fund 2.60% 9.94% 24.97%
ESGE iShares MSCI EM ESG

Optimized ETF

1.61% 7.77% 22.02%
PZD PowerShares Cleantech Portfolio 0.89% 2.44% 22.00% 14.06%
RODI Barclays Return on Disability ETN -5.47% 19.00% 19.00%
ESGG FlexShares STOXX Global ESG Impact Index Fund 0.07% 2.70% 17.90%
ESGN Columbia Sustainable International Equity Income ETF -0.82% 2.09% 17.76%
HECO EcoLogical Strategy ETF -1.84% 2.82% 17.74% 12.91%
ETHO Etho Climate Leadership U.S. ETF -0.20% 2.35% 16.37%

Top 10 ETFs by Environmental, Social and Governance Scores

Finally, let’s take a look at the top 10 socially responsible ETFs by ESG Scores. ESG (or Environmental, Social, and Governance) Scores measure the fund’s level of commitment to the socially responsible criteria. There are many ways to measure.

TICKER FUND NAME MSCI ESG ESG SCORE ESG SCORE CARBON INTENSITY SUSTAINABLE SRI SCREENING
QUALITY SCORE PEER RANK GLOBAL RANK TONS CO2E/$M SALES IMPACT EXPOSURE CRITERIA EXPOSURE
SUSA iShares MSCI USA ESG Select ETF 8.23 / 10 100 99.92 94.79 9.07% 4.66%
ESGD iShares MSCI EAFE ESG Optimized ETF 7.44 / 10 98.8 98.24 180.5 8.22% 10.37%
MPCT iShares MSCI Global Impact ETF 7.19 / 10 96.03 88.74 75.22% 0.65%
GRNB VanEck Vectors Green Bond ETF 7.03 / 10 94.7 94.09 8.6 3.91% 18.05%
ESGN Columbia Sustainable International Equity Income ETF 7.01 / 10 96.8 93.79 223.1 8.45% 15.49%
ESGF Oppenheimer Global ESG Revenue ETF 6.83 / 10 95.73 90.06 221 5.67% 12.86%
ESGW Columbia Sustainable Global Equity Income ETF 6.62 / 10 96.77 86.29 310.4 6.72% 13.83%
GEX VanEck Vectors Global Alternative Energy ETF 6.56 / 10 96.95 85.28 273.48 59.19% 2.30%
EFAX SPDR MSCI EAFE Fossil Fuel Reserves Free ETF 6.51 / 10 82.13 84.1 130.96 7.22% 10.99%
HECO EcoLogical Strategy ETF 6.50 / 10 85.33 84.07 70.87 7.70% 0.00%

So How do I invest in a socially responsible ETF?

Pick your ETF, then trade for free.

If you have a brokerage account, you can buy ETFs from within your account. For example, if you invest with Schwab, Fidelity, E*Trade, TD Ameritrade or any of the other online retail brokers, you simply enter the ticker symbol and buy the ETFs.

Some brokers are now offering commission-free trades for certain ETFs. That means you don’t pay a commission fee to buy or sell the ETF. However, we have not seen any socially responsible investing ETFs included in the commission free trade offers. That means you’ll be paying a commission fee to buy or sell the ETF. Commission typically range from $4.95 – $6.95 per trade.

If you’d rather not pay a commission, you can open an account on the Robinhood Trading app. They offer commission free trades, even on ETFs. Bonus:  Robinhood gives you a free stock when you open an account.

Or, get the benefits of mutual funds without the cost.

Another way to invest in sustainable companies is to use a robo advisor. We like Swell Investing. They are an impact investment platform offering a suite of sustainable companies. These portfolios are managed via a Separately Managed Account (SMA). You legally own the companies listed in their portfolio. The fee is only 008% instead of the typical mutual fund range of 0.45% – 3.38%.
Care about creating a greener world? Now invest in it.

The benefit: you get the benefit of having an active portfolio manager choose the companies in the fund. The portfolio manager takes an integrated approach at determining which companies should come in and out based on carefully chosen impact criteria. And you get all this without the typical cost of a mutual fund.

You don’t even need a brokerage account with Swell Investing. Their platform does it all-in-one. $50 is all you need to get started.

So get on your way and vote with your values.

Socially responsible ETFs are a great vehicle to invest in many socially responsible companies at once, reduce your risk, pay fewer fees and get better performance.

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