Socially Responsible Investing: 3 Funds that are Beating the Market

There’s a powerful trend emerging in the investing world. Investors are building portfolios based on their morals and values. Dubbed “socially responsible investing”, or SRI, these investors align their investments with their values by avoiding companies with poor environmental, social or governance practices.

Like their counterparts, sustainable investors also want to earn a good financial return on their investment. They don’t want to sacrifice performance for social impact. And these days, they don’t have to. For the last several years, the returns on socially responsible investments have risen sharply – and many are beating the S&P 500

 

What’s driving the boom in Socially Responsible Investing?

Socially responsible investing (SRI) funds have been enjoying increasing popularity, largely due to the emergence of “impact investing” – a feel good concept that started in the U.K.

The difference between the two is that socially responsible investing avoids investments that are inconsistent with the values of the investors while impact investing actively pursues a specific positive impact.

For example, funds that don’t invest in companies that make alcohol, tobacco, gambling and weapons are considered socially responsible investments. A more targeted approach, impact investing addresses specific issues like sustainability, women’s rights, the environment and more.

Just how popular is SRI?

In 1995, there were only 55 mutual funds that engaged in SRI, with $12 billion in assets. Today there are nearly 500, with assets exceeding $500 billion.

 

What’s In It for Investors?

Socially responsible investing looks a lot different than it did just a decade ago. As SRI has evolved, the advantages for investors are numerous:

 

  • SRI investors now have more investing options, with the number of funds growing rapidly. There is also increased diversification of the investments within the funds themselves, which results in less risk to the investor.

 

  • Investors can now invest in socially responsible Exchange Traded Funds (ETF). There are funds of various market capitalizations and investors can choose from domestic, foreign and global funds.

 

  • Investors can select a fund whose strategy and social responsibility agenda are similar to that of their own social and financial objectives.

 

Socially Responsible Investing Is Beating the Market

Socially responsible investing no longer means you have to sacrifice returns on your investment. The once meager returns of socially responsible investments have improved considerably, even beating the S&P 500. Consider the following:

 

  • The Index which tracks the equity performance of socially responsible funds, Focus iShares MSCI USA ESG Select Social Index Fund (KLD), has out-performed the S&P since 1990, with an average annual total return of 10.46% compared with the S&P 500’s 9.93%.

 

  • Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14%, compared to 9.69% for the S&P 500; July 1990 – Dec. 2014).

 

 

Not all SRI funds beat the index, but it is remarkable how closely most of them track the market as a whole.

Here are some ways to add socially responsible investing to your portfolio. At the time of this writing, I do not own a position in any of the funds mentioned in this article.

 

Socially Responsible Investing: iShares MSCI KLD 400 Social ETF

For investors looking for an easy way to add socially responsible investing to their portfolio, the iShares MSCI KLD 400 Social (DSI) is worth a look.

DSI posted a 35.5% return in 2013 — beating the S&P 500. DSI posted a 12.2% return in 2014, under-performing the S&P 500 by less than 2 points.

The ETF’s underlying index tracks 99% of all the stocks in the United States and includes firms with a variety of market caps. The socially responsible ETF currently tracks 400 different firms and charges 0.50% in expenses. Technology and health care firms make up the bulk of DSI’s holdings.

 

Socially Responsible Investing: iShares MSCI USA ESG Select ETF

Investors wanting to eliminate the volatility of owning smaller firms from their portfolios should consider the iShares MSCI USA ESG Select ETF (KLD).

The $350 million ETF includes U.S. large-cap and some mid-cap stocks which have been screened for positive SRI characteristics. It currently includes almost a hundred different stocks — with top holdings in 3M (MMM), Microsoft (MSFT) and renewable energy utility NextEra Energy (NEE). Expenses for KLD are also 0.5%.

The socially responsible investing fund has consistently posted solid returns over the last several years. In 2013, KLD posted a 31% return, which was slightly less than the benchmark index, although KLD had beaten the index for the past 5 years. In 2014, KLD posted a total return of 13.5%.

 

Socially Responsible Investing: Huntington EcoLogical Strategy ETF

The often overlooked Huntington EcoLogical Strategy ETF (HECO) focuses on various firms making efforts on environmental issues and sustainability. It’s a well-diversified, moderate risk, capital appreciation fund. HECO focuses on “ecologically focused companies”, firms that have positioned their businesses to respond to increased environmental legislation, cultural shifts toward environmentally conscious consumption and capital investments in environmentally oriented projects.

HECO holds more than 50 different companies including Starbucks (SBUX) and Texas Instruments (TXN).

The returns have been strong. HECO returned nearly 30% in 2013 and narrowly outperformed the benchmark in 2014. Expenses for the ETF are slightly high at 0.95%.

 

Final Thoughts

You don’t have to give up performance to invest with your conscience and make a difference.

Serious investors interested in socially responsible investing no longer have to sacrifice investment returns for their morals. And the easiest way to add SRI to your portfolio is an Exchange Traded Fund such as the funds mentioned above.

The information provided is for informational purposes, not a recommendation. As always, investors should consider their own financial objectives and time horizon when making investment decisions. Diversification and asset allocations are important considerations.

Sources:
5 ETFs for the Socially Responsible Investor by Dan Kaplinger
Socially Responsible Investing With ETFs by Greg Lessard
Socially responsible investing has beaten the S&P 500 for decades by Jennifer Openshaw

 

Laura Beth Laura Beth writes at How To Get Rich Slowly about developing lifelong habits for financial fitness and living a better life – financially, physically, and mentally. To get more ideas for achieving financial stability and living a rich life, visit her site.

23 thoughts on “Socially Responsible Investing: 3 Funds that are Beating the Market

  1. This is an interesting subject. I wonder, however, if investing in firms that are socially responsible is 100% accurate/efficient. I imagine that there are many depths and levels of corporate practices and affiliations that are not considered in choosing SRI companies. I am also curious about how these companies are selected in the first place. Also, does purchasing shares in a company actually benefit it directly? I was always under the impression that a company mainly benefits from the IPO and issuance of additional shares to raise capital. These are all just questions to further my own understanding. Thanks for bringing this interesting subject to my attention! I will have to research further into them.

    Jim

    • Hi Jim,

      Let me try to answer your questions. First, purchasing stock in the company does in fact benefit the company, at least indirectly. Because key employees usually own large blocks of the company’s stock. I am not sure I understand you question about whether it’s efficient. But no, I don’t think it would be efficient or wise to buy individual stocks unless you do your research regarding their ESG factors (and diversify your portfolio). Without a doubt, the easiest way to invest in SRI is via an ETF such as one mentioned in the article.

      You are spot on with your other point and thanks for bringing it up. There ARE many depths and levels of corporate practices and affiliations that are not considered in choosing SRI companies. I came across quite a bit of information about how they select and rank these companies for various criteria, but in the end decided to leave it out of the article due to the length. But it might be the subject of a future guest post, Keith willing.

      The best thing you can do is read all the information presented in the prospectus and figure out if that’s where you want your money to go.
      Laura Beth @ How to Get Rich Slowly recently posted…4 Things to Remember on Your Journey to FreedomMy Profile

  2. In our “Greed Is Good” world, it’s great to see that you can invest in an ethically sound manner and still make a great return on your money. People in this country have a view of investing as giving money to greedy, evil corporations that poison our food, contaminate our water, and get rich off of economic destruction and we come to the view that you have to choose between making money and making a positive difference. It’s nice to see that you can do both.

    Thanks for the article.

    Sincerely,
    ARB–Angry Retail Banker
    ARB recently posted…The Pros And Cons Of Different Types Of Investing: Part 1 — StocksMy Profile

    • Hi Ben!

      There is a whole science behind the ESG criteria recently because of the whole “impact investing” movement, and it is a movement. And because the big wealth companies and money managers are now getting into the game, companies don’t want to be left out, so compliance with the criteria is improving. If you go to the iShares site, they show which factor is most prevalent in the fund. Some are more geared toward environmental stuff, others more on the social and some on the governance end of the spectrum. But the number of funds is growing rapidly as more and more investors get in the game.
      Laura Beth @ How to Get Rich Slowly recently posted…4 Things to Remember on Your Journey to FreedomMy Profile

  3. This is a great topic Keith. It’s hard, I hate investing in a tobacco company but man do I love the dividends. Sometimes our personal beliefs don’t align with what’s best for us financially. Sometimes, it just comes down to business.

    With that being said, I’m glad that the socially responsible investing strategy is picking up steam and gaining more of a following. If there is demand for it, supply will follow. Hopefully soon there will be even more options to choose from whether they are in the funds or dividend paying socially responsible companies. I’m glad to see that 3M is one of the top holdings of the funds considering I made a large investment in the company earlier in the year.

    Thanks for the great/fun article.

    Bert
    Dividend Diplomats recently posted…Dividend Impact of a Potential Acquisition for Norfolk Southern (NSC) ShareholdersMy Profile

  4. I don’t personally invest in those type of companies, not because of morals or anything, but I feel tobacco companies and companies with self destructing products will be in a downtrend as more and more information becomes available to the users of those products and socially it becomes less accepted and encouraged. Love the article, it is a topic I haven’t given much thought!

    Thanks!

    • Hi Andrew,

      I’m happy that you enjoyed this read. There are many who are averse to investing in “sin” stocks for various reasons. It may be related to alcohol, gambling or smoking and even energy but those “personal” choices are part of what makes “personal” finance fun and unique. No doubt that smoking, at least in the U.S., is on a long term down trend. Of course, that’s when these companies must learn to adapt to changing consumer habits and preferences. We already are witnessing marijuana and vapor products coming under the guise of big tobacco. Still, it’s food for thought about considering investing in socially responsible companies. Thank you for stopping by and commenting.

    • I understand what you’re saying and I try to avoid those companies too. Maybe the fact that socially irresponsible companies seem to be down-trending is one of the factors driving SRI.

      Thanks for your comment Andrew.

  5. Hi Laura Beth, thank you for sharing this information on socially responsible ETFs. It is certainly become more and more popular to look beyond the financial data to corporate social responsibility. I personally do not plan on investing in ETFs as part of my strategy, but I will certainly keep an eye on these ones as it will be interesting to see how their performance stacks up compared to the overall market. I note that many of the companies on my own watchlists are included in the KLD ETF. Cheers
    Dividendniche recently posted…Dividend Income Update NovemberMy Profile

    • Hi DN,
      I know a lot of folks don’t use ETFs as part of their investing strategy. I think it’s interesting though that many people do not consider the social factors when buying individual stocks. Warren Buffett talks about the importance of knowing the companies you invest in in his 1996 letter to shareholders (circle of competence) and investing in what you know. Yet most people use charts and graphs instead, basing their decision primarily on past performance.

      Thanks for your comment!
      Laura Beth recently posted…Inspirational Scenes from ‘The Pursuit of Happiness’My Profile

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