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 fundsESG stands for Environmental, Social and Governance, an alternative set of criteria used to evaluate a company’s impact on society. In addition to traditional metrics such a profitability, risk, and sector weighting, the managers of ESG funds may also weigh a company’s contribution to global warming, the labor conditions of its workers, or whether its board is exercising adequate oversight over a company’s executives. 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” stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. 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 bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., 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 ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. & Socially Responsible Investing History
Vanguard announced plans to launch two new exchange-traded fundsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. (ETFs)A type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. in September that will track a pair of FTSE All-Cap Choice indexes. ESG U.S. StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. 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 riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. (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 BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. 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 bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. 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 fundESG stands for Environmental, Social and Governance, an alternative set of criteria used to evaluate a company’s impact on society. In addition to traditional metrics such a profitability, risk, and sector weighting, the managers of ESG funds may also weigh a company’s contribution to global warming, the labor conditions of its workers, or whether its board is exercising adequate oversight over a company’s executives. 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. stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. 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 volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in., 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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• We act in their best interests
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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

Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To.

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