** IMPORTANT DISCLAIMER: This is not investment advice. Electrade can not be considered tax or investment advice. All investing carries risk. We are simply trying to save you time researching the green-ness of your investments.**
The terms “eco-friendly”, “sustainable’, and “green” get thrown around so often their meaning is diluted over time. With so many banks and financial institutions marketing green ETFs and ESG funds, how can one make sure they are really supporting eco-friendly initiatives? We’ll answer this question today and offer some of the best ETFs to put your money into.
What is an ETF?
What is an ETF? ETF is an acronym for Exchange Traded Funds, which allows investors to purchase a large basket of stocks that include various types of bonds within to diversify their profile.
Is an ETF the best way to go, or should you stick with tried and true mutual funds? Let’s take a look at the pros and cons of investing in exchange traded funds.
An ETF is often seen as the main alternative to either holding single stocks or investing in a traditional managed fund where a human is buying and selling stocks for you in an attempt to match/beat the market.
Pros
- They incur way lower fees (Low expense ratios)
- They are lower risk due to being very diversified
- Can be traded like stocks - buy or sell any time the markets are open
- Dividends can be reinvested immediately
- Often tax efficient (depends on a case by case basis)
Cons
- No customization possible
- No advice or personal touch vs. traditional managed funds
What is an Index Fund?
Above we have established that an ETF is a method of buying a fund. Within this group, there is the index fund. Index funds are types of ETFs (can also be mutual funds) that work to track a specific index in a market. They are pegged to the price of a basket of stocks. They are an excellent option to diversify the risk of holding stocks over many stocks, while requiring minimal management on your part - you don’t have to go out and buy stocks in 50 companies - the fund will do this for you. Often with super low management fees (look for fees below 0.05%).
Pros
- Considered steady
- Low fees vs. traditional, managed funds.
- Great for beginners who don’t want to self-balance a portfolio yet.
- Diversity built in (can be lower risk)
Cons
- Less flexibility in index composition
How Can Funds be Eco-Friendly, Green or Fossil-free?
Now that we have a better idea of what ETFs and index funds are, let’s dive into how they can be eco-friendly.
What makes these funds “green” is basically what they invest in, and more often than not what they don’t invest in. For example, there are clean energy ETFs that include stocks invested in clean energy.
There are three main methods that an index fund can be considered green or eco-friendly:
- Clean Energy Only: It invests only in clean energy companies (like iShares Global Clean Energy below)
- ESG: The fund invests only in companies that fulfill Environmental, Social and Governance criteria (like Vanguard ESG below)
- Divested in Fossil Fuels: The fund does not invest in fossil fuel promoting companies ()
They are in a sense three ways of telling the same story. And generally, investing in any of the above is greener than investing in the general market (like a VTI index fund). But there are caveats.
Caveats of the Clean Energy Only method
Funds like iShares Clean Energy below have a bunch of shares in Vestas and Tesla. If these stocks happen not to be growing currently, then your portfolio will not grow - regardless of what the broader market is doing. This opportunity cost is the main cost of investing in something like iShares Clean Energy index in our opinion.
Caveats of the ESG method
Sustainable investing is putting your money in stocks that support green initiatives. Examples of this are ESG funds, which look at the environmental, social and governance factors of a company in order to determine if their practices meet the standard. This is a vague term, with often vague outcomes - does Apple have better ESG practices than Shell Inc? Does Facebook/Meta have better ESG practices than Walmart? Maybe. Confusing this further is that the Environmental factor includes companies that “Are working to save energy including energy efficiency” - which opens the door to pretty much any company out there that is looking to save on its energy bills.
Also know that it’s not easy for a company to pass all three criteria, so you should keep in mind that just because an organization hasn’t passed all the requirements, it doesn’t mean that same company isn’t doing its part to improve.
Caveats of the Fossil Free method
A clearer way to differentiate is for an index fund to not include investments in companies that help build (and lobby for) a fossil fuel based economy. So they take the broad market, and then do not include certain companies. This is the method that we like most, but please note that there may be other unsavory companies in your portfolio - just not Fossil Fuel funding ones.
The Best Sustainable Funds Available
People are becoming more aware of green investing, which is why sustainable funds have gained immense popularity. Investors should be aware of “greenwashing”, which is basically misleading advertising where a company claims to be sustainable in their practices, but in fact they are not.
You want to avoid these companies and not invest in their stocks, which brings us to our list of the best sustainable funds available on the market.
1. Vanguard ESG
The first one is the Vanguard ESG. It’s a domestic stock with a very low expense ratio of only 0.12% as of December 2020. This particular fund has also been vetted and assessed according to ESG criteria and its portfolio does not include stocks from industries such as tobacco, fossil fuels, nuclear power, and adult entertainment to name a few.
You also won’t find any stocks that violate human rights or do not meet certain diversity standards. The Vanguard ESG adopts a passive management approach and has seen a slow and steady rise in performance in the last decade.
2. iShares Global Clean Energy ETF
It’s very obvious what the iShares Global Clean Energy ETF is invested in. It puts focus on companies that produce solar and wind power along with other renewable resources. Out of 10 on the MSCI ESG Quality Score scale, the iShares Global Clean Energy ETF has a 8.7 rating, which is considered high.
It also achieves a triple A rating on the MSCI ESG Fund Rating and has an ESG quality score of 94.44%. We will admit that the expense ratio is higher than the Vanguard ESG, but it’s still within a reasonable range at 0.42%.
Some of the iShares Global Clean Energy ETF holdings include Enphase Energy, Vestas Wind Systems, SolarEdge Technologies and Plug Power Inc.
3. Investco Solar ETF
On the MAC Solar Energy Index, Investco Solar ETF has its assets largely based in securities investments. Most of their stocks are centered around IT (Information Technology) in the US with top holdings that include the likes of Enphase Energy, SolarEdge Technologies, SunRun Inc and First Solar Inc.
The total expense ratio of Investco Solar ETF outranks the iShares Global Clean Energy ETF at 0.69%. It’s not as low as the Vanguard ESG, but it still sits below the average 0.75% to be considered on the low end.
4. First Trust Global Wind Energy ETF
First Trust Global Wind Energy ETF is another option that centers around renewable energy, with holdings in Vestas Wind Systems, Northland Power Inc, and Innergex Renewable Energy Inc. The ETF has an expense ratio of around 0.60%.
The ISE Clean Edge Global Wind Energy Index tracks the performance of public companies engaged in wind energy. Each company within the ETF is rated either as Pure Play or Diversified. Pure Play companies have reached at least 50% of their revenue from wind-related initiatives, while Diversified companies means they have a hand in some part of the industry.
5. Vanguard FTSE Social Index Fund (VFTAX)
The Vanguard FTSE Index Fund tracks the performance of the FTSE4Good US Select Index and has an expense ratio of 0.18% - one of the lowest around along with the Vanguard ESG.
You won’t see any of its holdings within companies that participate in adult entertainment, tobacco, nuclear power or fossil fuels. Companies have also been screened according to ESG criteria and you won’t find ones that are associated with corruption, human and labor rights violations and ones that do not meet certain diversity criteria.
6. Other great companies and funds to watch
Conclusion
It’s important to know where your money is going and what you’re funding. The best way to do it is to look into each fund in detail. If you don’t have the time, these are the top 5 available on the market that focus support on companies that engage in renewable energy and avoid vice products.
** IMPORTANT DISCLAIMER: This is not investment advice. Electrade can not be considered tax or investment advice. All investing carries risk. We are simply trying to save you time researching the green-ness of your investments.**