Should Your Wealth Management Strategy Include ESG Funds?

Should Your Wealth Management Strategy Include ESG Funds?

Vanguard & Fidelity Expand ESG Investment Options

It’s a well-worn maxim that you shouldn’t let your emotions control your investment decisions. What about your conscience?

Investor interest in “environmental, social and governance” (ESG) funds has been on the rise, and both Vanguard and Fidelity want to get further in on the act.

As a refresher, ESG funds or indexes screen companies based on the three criteria in the acronym, although different fund managers and index providers all have their own interpretations and approaches to determining which companies are “good” and which are “bad.”

Typically, the environmental screen cuts polluters and seeks companies using clean tech and renewable energy; the social aspect cuts “sin” stocks like firearms makers, adult entertainment companies, alcohol producers and businesses with poor labor policies; and the governance category rules out companies with poor scores on transparency, diversity and ethics.

The idea is to create a “clean” basket of stocks (or bonds, in the case of Fidelity’s newest offering) issued by companies that may or may not be making the world a better place, but at the least are not making it any worse.

Vanguard’s ESG ETFs & Socially Responsible Investing History
Vanguard announced plans to launch two new exchange-traded funds (ETFs) in September that will track a pair of FTSE All-Cap Choice indexes. ESG U.S. Stock ETF will own stocks of U.S. companies that meet the firm’s ESG criteria, while ESG International Stock ETF will do the same for non-U.S. stocks.

The proposed ETFs’ costs, at just 0.12% and 0.15%, respectively, are compelling. But is that enough?

Vanguard has long offered a “socially responsible investing” (SRI) fund—its FTSE Social Index has been an option for investors since May 2000 (originally Calvert Social Index, it changed names and benchmarks in 2005).

Unfortunately for the fund’s investors, it has a mixed track record since inception. While the fund has had periods of relative outperformance compared to the broad market, over the long haul, the fund has underperformed Vanguard’s 500 Index fund and done so with greater risk (as measured by standard deviation, which gauges the magnitude of an investment’s swings from its long-term average return—the higher the standard deviation, the more volatile or risky an investment is said to be). Over the period charted below, FTSE Social Index gained 125.7% while 500 Index gained 165.4%, and the SRI fund was 14% more volatile. Lower returns and higher risk than the market are not a great combo.

But the real pain for long-term investors in FTSE Social Index came in the two successive market crashes this century—the fund declined over 50% during the bursting of the tech bubble in 2002, then never quite recovered its prior highs before falling another 59.5% during the 2007–2009 financial crisis. In comparison, 500 Index declined nearly 45% in the tech bubble fallout and 51% during the financial crisis. Sobering pullbacks for sure, but not on par with FTSE Social Index’s steeper drawdowns.

Note: Chart shows hypothetical growth of $10,000 invested in Vanguard 500 Index and Vanguard FTSE Social Index from 6/30/00 through 5/31/18. Source: Morningstar.

None of this is to say that Vanguard’s new ESG ETFs will follow a similar path (and we do not currently have track records for the underlying benchmarks to analyze). The above is solely to demonstrate how the company has delivered on the promise of SRI to date.

Fidelity’s ESG Bond Index Now Open
This week marked the launch of Fidelity’s Sustainability Bond Index fund, which the firm boasts makes it the only provider of “sustainable” investment options in the three major asset classes (U.S. stocks, foreign stocks and bonds).

The fund seeks to track the returns of the Bloomberg Barclays MSCI U.S. Aggregate ESG Choice Bond Index. The index’s starting universe is the Bloomberg Barclays U.S. Aggregate Bond Index, which is then screened by MSCI for issuers that meet its ESG criteria.

Fidelity Sustainability Bond Index charges 0.20% in fees for the fund’s investor shares (ticker: FNASX). It joins the U.S. Sustainability Index Fund (FENSX) and International Sustainability Index Fund (FNIYX) in Fidelity’s ESG stable.

Fund providers have been slower to jump on the ESG bond bandwagon—there are just a couple of dozen options available currently—but if Fidelity’s newest fund is any indication, that may change. For now, interested investors have a low-cost ESG bond fund to consider, but whether it’s capable of competing with a broad bond market fund remains to be seen.

Is ESG Investing for You?
We’d caution investors considering ESG or socially conscious funds (whether from Vanguard, Fidelity or any other provider) that by excluding certain securities, long-term returns could suffer.

At Adviser Investments, we prefer to let the active managers we invest in select the best investment opportunities available. We believe you should first invest to profit, and then support organizations whose missions match your own beliefs.

That said, if you feel an ESG fund will help you meet your investment goals and sleep better at night, it might be the best choice for you. For that reason, we have developed two distinct ESG strategies that leverage our active-management and dividend-growth expertise to help our SRI-inclined clients align their investments with their values. To learn more about Adviser Investments’ ESG options, please click here.

Fidelity Adds Index Fund Options

Is Fidelity preparing to wage a fee war against… itself?

In early June, Fidelity filed papers with the Securities and Exchange Commission, registering two proposed index funds that will seek to track the entire U.S. stock market and the worldwide market of large- and mid-cap stocks.

Big deal, you might think. For investors seeking broad exposure to the entire U.S. market at a low price, Fidelity already offers the $53.3 billion Total Market Index fund, which tracks the Dow Jones U.S. Total Stock Market Index. Likewise, its $22.6 billion International Index fund tracks the MSCI EAFE index of stocks in developed foreign markets. These products have been available for more than 20 years.

Here’s the catch: Unlike their older siblings, the newly proposed funds won’t follow third-party indexes, but rather internal benchmarks designed by the Boston fund giant itself and maintained and calculated by Standard & Poor’s. The proprietary benchmarks—Fidelity U.S. Total Investable Market index and Fidelity Global ex U.S. index—launched in March.

These new funds will be self-indexed versions of the existing market-cap-weighted total market index-fund options. They’ll even have the same subadvisor—Geode Capital Management, which handles day-to-day administration on Total Market Index and International Index, will do the same on the as-yet-unnamed versions tracking the internal benchmarks.

The rationale behind the creation of new funds so similar to existing, popular products? Pricing, most likely. While Fidelity has been mum thus far about what the difference in cost is going to be, fund sponsors are increasingly developing proprietary indexes to keep expense ratios down while jockeying to claim the lowest fees in the market.

The preliminary prospectus filed with the SEC doesn’t spell out the construction of the in-house indexes these funds will seek to mimic. It also didn’t get into any specifics as to what the new funds will cost.

The existing funds are already some of the most affordable in their respective categories. Investors in Total Market Index fund currently pay 0.09% in expenses, while the International Index fund charges 0.16%.

Fidelity’s not the first to add similar products to an existing offering. The popularity of index funds has already caused Vanguard to offer multiple index funds and ETFs that track similar market segments using different third-party index providers and the benchmarks they set.

And as we’ve covered before, Fidelity has also launched six U.S. and two international “factor,” or “smart-beta,” funds in the last two years, each of which tracks an internal index. However, rather than passive indexes tracking a broad market, those in-house indexes maintain an active element because their composition is regularly tweaked to focus on their investment factor (momentum, low volatility, etc.).

We’ll wait and see if moving the broad indexes in-house can help Fidelity deliver even less expensive index fund offerings than its existing products. If so, it’ll be essentially competing against itself as well as its also-cheap competitors’ offerings.

Financial Planning: Investing in Your Financial Future

As regular readers know, there’s a lot to keep up on to be a well-informed, savvy investor and wealth builder. Our lives are becoming increasingly complex. And when it comes to your wealth, a financial plan tailored to you is a key component of that wealth-management strategy.

Making informed decisions about taxes, insurance, investments, cash flows and estate planning can be overwhelming. We’re here to help with a dedicated Adviser Investments Financial Planning Team that works directly with our clients and their Portfolio Management Team to deliver a plan that is customized and comprehensive, yet easy to understand and implement.

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Developing a personalized plan is not just a smart money move—it’s a great investment toward securing your financial future. To learn more about the financial planning resources available to clients of Adviser Investments, please click here now!

Please note: This update was prepared on Friday, June 29, 2018, prior to the market’s close.

About Adviser Investments

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