When it comes to investing, there are a number of factors that can influence your decision. Individual investors may give different weighting to these considerations based on their personal beliefs and risk tolerance.
With that in mind, one way to filter the ETF selection process is by focusing on those with an ethical ETF option.
An ethical ETF option incorporates specific criteria into its investment strategy and may be an important consideration for individual investors who are looking at how their investments align with their personal values.
You’ll find that ethical ETFs may incorporate social, environmental, and governance (or “ESG”) criteria into their investment strategy. There are many types of ESG ETFs available, which we will discuss in more detail below.
Read on for a breakdown of some of the most common moral stock ETFs and how they differ from other types of equity fund strategies.
What’s an ESG ETF?
An ethical ETF is a stock fund that is designed to meet specific social or environmental criteria. The idea is that an ethical ETF will help promote positive social or environmental change through its investments by screening its portfolio companies based on ESG criteria.
These are non-financial criteria that factor in how a company is run and how its activities may impact society. For example, an ESG ETF may only invest in companies that are environmentally sustainable, treat their workers fairly, and are not involved in any egregious practices such as slave labor.
For moral stock ETFs, ESG criteria come ahead of price, liquidity, and yield considerations when making investment decisions. This means that the ETF fund manager may pass over more profitable investment opportunities that don’t meet the fund’s ethical investment criteria. As a result, ethical ETFs tend to have a higher expense ratio than other funds.
Socially Responsible ETFs
Socially responsible ETFs are focused on investing in companies that are considered good corporate citizens. These funds look at employee treatment and diversity, environmental impact, philanthropy, and community involvement to determine a company’s “goodness” as an investment.
Environmentally-Focused ETFs
Environmentally-focused ETFs invest in companies that either produce renewable energy or are involved in developing sustainable agriculture.
For example, an environmentally focused ETF may only invest in companies that make solar panels or wind turbines, or whose core business is something like a utility company that relies primarily on renewable energy sources to operate.
Thus, you can expect environmentally-focused ETFs to avoid investments in fossil fuel companies and may mandate that a company’s operations be 100% powered by renewable energy.
Governance Focused ETFs
A governance-focused ETF is a fund that selects stocks with a focus on corporate governance.
Governance focused ETFs can be a good option for investors who want to maintain their portfolio’s focus on long-term growth but want to incorporate governance factors into their decision-making process. These funds generally focus on investing in large-cap stocks because smaller companies are harder to clear the ESG requirements for.
In Conclusion
The investment industry has seen a rise in moral stock ETFs in recent years, and it’s important to understand the differences between each type of ETF to see which one is best for your own investment strategy.
Just try to look for one that aligns with your values and meets your investment objectives.
