From time to time I get emails or comments from people who have moral qualms with index funds–the issue being that the investor doesn’t want to own shares of companies that do things to which he/she is ethically opposed.
First of all, let’s be clear on one thing: Buying shares in a company does not really help the company itself. In almost every case, you’re buying shares from another investor. The company isn’t even involved in the transaction.
(One could argue that buying shares drives up the price, which helps the company, but that’s quite a stretch. For most of us, even if we invested our entire net worth in one company, the share price would hardly budge. Investing in index funds will have no impact upon the price of a given company’s shares.)
That said, if the issue isn’t so much that you don’t want to help the company by buying shares, but simply that you can’t justify owning shares of companies that do things you find morally reprehensible, then fine. That, at least, makes sense.
So if that’s your viewpoint, how should you go about investing?
Socially Responsible Mutual Funds
There’s an entire industry built around offering mutual funds that only invest in companies that fit certain criteria (some are religious-based, some are environmental, some screen out certain industries, etc.). It’s a neat idea.
But there’s one big problem.
The expense ratios are nothing short of appalling. Take a look. 2% annual expenses with a 5% sales load? Yuck!
Constructing a Low-Cost, Socially Responsible Portfolio
There are, at least, some low-cost, socially responsible investment options. Unfortunately, they’re few and far between, and constructing a properly diversified portfolio is rather difficult. That said, I think the main building blocks would be as follows:
In the domestic stock category: Vanguard’s FTSE Social Index Fund carries a relatively modest 0.31% ER.
Fixed income: This part is easy–simply avoid corporate bond funds completely and invest exclusively in low-cost Treasury-bond funds. (Many experts recommend doing this anyway, for purposes entirely separate from moral considerations.)
International stocks: This part of the portfolio is trickiest, as I can’t find a single option that I’d really be happy investing in. My pick at this point would be Domini European PacAsia Social Equity Fund. (Portfolio turnover 31%, expense ratio 1.60%–far too high for my tastes, but modest among socially responsible funds.)
The Vanguard index fund is a large-cap growth fund. So an investor may want to include a domestic large-cap value fund and/or a domestic small/mid-cap fund as well.
Essentially, you have to perform a balancing act. On the one hand, you can lower your costs by over-weighting the Vanguard fund (the domestic, large-cap growth portion of your portfolio). Or, you can benefit from additional diversification (at the cost of higher expenses) by increasing the allocation to other equity classes–whether international stocks, small/mid-cap domestic stocks, or domestic value stocks.
Also, the above portfolio necessitates having accounts with at least 2 brokerage firms (Vanguard and Domini Social Investments). Vanguard has no account fees, and as far as I can tell, neither does Domini, but having multiple accounts is still a bit of a pain.
Finally, the published expense ratio on the Domini fund takes into account a waiver of fees–something that always concerns me. (More on this topic tomorrow. )
What do you think? If you were going to construct a “socially responsible” portfolio, would it look similar to the one above?