122. How I switched to a more socially responsible index fund

This week, host GG Gimja will share the simple process she used to move her investments to a more socially responsible index fund.

Links from today’s episode:

How to choose the best index fund | Forbes

https://www.forbes.com/advisor/investing/how-to-choose-the-best-index-fund/ 

ICYMI another episode you might enjoy:

Episode 76 The Surprising Truth About What ESG Investing Actually Means (recorded before the 2024 rebranding of this show)

Connect With Genet “GG” Gimja:

Website https://www.progressivepockets.com

Twitter https://twitter.com/prgrssvpckts 

Work With Me:

Email progressivepockets@gmail.com for brand partnerships, business inquiries, and speaking engagements.


The information provided in this podcast is for general entertainment purposes only and should not be considered as professional financial advice. We make no guarantees about the accuracy or applicability of the content. Consult a qualified financial professional before making any investment or financial planning decisions.

Transcript

Welcome to Progressive Pockets! I go by GG, that’s short for Genet Gimja and I’m your host as we explore the topic of how we can align our values, our beliefs, our desires for the world around us and what we do with our money on a daily basis.

On this show, I’m always going to share some practical suggestions that are gentle and meet you where you are. Sometimes, as people who care deeply about our communities and our world, I think we can become stuck when we try to pick the “perfect” thing to do, and so on this show, I’m sharing good things to do. Not perfect things. And sometimes they’re just “better” than what we might be doing now. 

So that’s the energy I’m bringing to this conversation today. I do believe we need deep transformational change in our country, we need to overhaul the systems that have been created to maintain the status quo, but in the meantime, while we advocate for those big changes, I’m still going to share suggestions on the ways we can maybe make things slightly better every day.

Today I want to share my recent experience in trying to move some of my retirement money into a more socially responsible index fund. Trying to move my money to somewhere that’s even a little better than where it was before. 

I am not a financial advisor, that’s why I’m not giving you any legally liable financial advice on this show, ever, you are going to need to consult with a professional for professional advice, someone that is licensed in your state. 

I am just sharing what I learned as I researched publicly available information about how I might be able to better align my personal values with my retirement savings.

The money in question was in an IRA account, so this was not an employer sponsored 401K. Basically, at the end of every year, I tend to put money into an IRA and some time back I went on this journey of figuring where I wanted to put the money to work. 

I am a big fan of index funds and ETFs. So that’s where I focused my research.

For this particular investment, I wanted to pick an index fund with general socially responsible principles, you might hear about these being called ESG investments. What I mean by that is, I was looking for an index fund that generally included companies with better rankings when it comes to looking at the risks they take environmentally, socially with their employees, and with their governance. If you’ve ever heard me talk about ESG ratings on this show, you know that I don’t think it comes even remotely close to being a score for how socially responsible a company is, but it is what we have for now, and I was comfortable using it for this particular investment.

So, there are lots of index funds and ETFs on the market. And I wanted to look for one that looked like it was more socially responsible than a total market index fund, but also would still hopefully provide good returns and didn’t have tons of hidden fees in it.

I asked more experienced friends and acquaintances their strategies for comparing index funds and I also turned to what I could learn in books and online.

The first piece of advice I received was to not pick a brand spanking new index fund. Wait until it has established itself a bit. For me, I decided that I wanted an index fund that had been around for at least a few years.

The second advice was very helpful and that was to pick a base for comparison, or a benchmark. At first, I thought I would choose the NASDAQ100 Index as my benchmark because it contains 100 large companies traded on NASDAQ. But then I thought more about it and I realized that if I hadn’t been thinking about social responsibility at all, what I would have chosen would probably be the VTSAX index fund. That is the Vanguard Total Stock Market Index Fund Admiral Shares. It is a mix of small, mid, large cap, it is a low cost index fund, broadly diversified. I think of it as a plain vanilla index fund for me. So I set that as my benchmark. Which meant that I would compare any socially responsible index fund to VTSAX, my benchmark.

Ok, so that was step 2. Now on to step 3.

The third thing I did was to look for index funds that have flagged themselves as being more socially responsible. Often they would put ESG in the name of it, I also looked on my investing platform to see what they suggested when I filtered for key words like climate change or impact or socially responsible. Over the past few years, I had also been making note whenever I heard someone mention a socially responsible index fund, or if I saw one in a book or in the newspaper. For example, one that I had heard of and was tracking was iShares MSCI KLD 400 Social ETF (Ticker: DSI). Let’s use that one for the purposes of our discussion today.

So I had DSI that I had been curious about, and my benchmark VTSAX.

Step 4: Find out what is included and excluded from this index fund

For my benchmark VTSAX, it is really designed to include the entire market, and it does. It includes around 4,000 companies. 

For DSI, which I was considering, it includes about 400 companies, they are also trying to achieve a spread among small, mid, and large cap companies. And they actively have screened out a lot of companies using these principles and this is from their website.

“As part of its investment objective this fund seeks to track an index that applies the following business involvement screens: adult entertainment, alcohol, civilian firearms, controversial weapons, conventional weapons, fossil fuel extraction, fossil fuel reserves ownership, gambling, genetically modified organisms (GMOs), nuclear power, nuclear weapons, thermal coal power and tobacco. The business involvement screens are based on revenue or percentage of revenue thresholds for certain categories and categorical exclusions for others.”

So then I also looked into the definition of each of those. Alcohol and adult entertainment are not on my list of things I would screen out, but I was curious to see what they meant when they mentioned some of the weapons screens and the environmental screens. And for some of the things I cared about they had screened out companies that had any ties at all to that particular thing, for example for civilian firearms, they screened out companies with ANY TIE to civilian firearms, covering the production and distribution (wholesale or retail) of firearms or small arms ammunitions intended for civilian use, as well as ownership of or by another company with involvement. It does not include companies that cater to the military, government, and law enforcement markets.

But then for other screens, the threshold was different. 

Like for thermal coal power. For that one, the threshold is 5%. Here’s how they put it:

All companies deriving 5% or more revenue (either reported or estimated) from thermal coal-based power generation were screened out of this index fund.

DSI top sectors last time I looked were: Technology, Financial Services, Healthcare, Communication Services, Industrials, Consumer, Real Estate, Basic Materials, Energy, Utilities

The top 10 holdings in that index fund were: Microsoft Corporation, NVIDIA, Alphabet, Tesla, Visa, Procter & Gamble, Mastercard, The Home Depot, Merck

So you can see this is the most basic level of impact investing or socially responsible investing, it’s literally just doing a screen for the most egregious companies. And I just chose from the very popular index funds for this purpose.

Step 5: Returns

So the fifth thing I did was to look at the historical returns. I looked at both DSI and my benchmark VTSAX to see what the returns were like over the past 6 months to make sure this index fund isn’t in crisis or something, then I looked at 1 year, 3 year, 5 year, and 10 year returns and the returns since inception.

So for example, the 1 year return for DSI was about 30% when I looked at it. For VTSAX it was 22%. I mean both of those are wow.

The 5 year return for DSI was 15%. For VTSAX it was around 12%. 

The 10 year return for DSI was about 13%. And for VTSAX it was around 12% again.

So the returns for DSI were higher than VTSAX for each of those time periods, not that I needed that to be the case, honestly I think similar returns are fine, and lower returns can also be fine, if I’m getting a great fit for my values.

But let’s continue this analysis, I hope this is helpful. Who knew this wasn’t rocket science? Sometimes it almost feels like the financial sector has been designed to be intimidating. Hmmmm.

Step 6: Fees

Next, I looked to try to understand what kind of fees I’d be paying.

From my research, I understand that a reasonable expense ratio for an actively managed portfolio is about 0.5% to 0.75%, while an expense ratio greater than 1.5% is typically considered high these days. For passive or index funds, the typical ratio is about 0.2% but can be as low as 0.02% or less in some cases.

For my benchmark VTSAX, the expense ratio was 0.04%.

For DSI, the index fund I was considering, the expense ratio was 0.25% which is 6 times higher than my benchmark, but lower than what an actively managed portfolio would typically charge.

So looking at all of that information, the conclusion I came to was that DSI is a good option for a very basic index fund that does a basic screen and doesn’t charge a very high expense ratio.

I really enjoyed going through this process and I hope you’ll try it too. Even if you have a financial planner, I think sometimes it’s good to try it yourself to remind yourself of what you’re paying for. Sometimes it can make you more grateful for your team, and sometimes you realize that maybe you can do it yourself.

So to recap, these are the 6 steps I followed to decide on a better index fund that better aligned with my values:

1. Do an internet search, ask friends, look in books, gather up a short list of a few socially responsible investments that you want to investigate.
2. Pick a benchmark to compare to. In my case, I was looking at index funds, so I chose a very vanilla index fund that is what I would normally choose.
3. Take the short list of contenders and do a very light internet search to see if they have flagged themselves as being for impact investors or socially responsible investors or ESG investors, any of those type of tags.
4. Find out what is included and what is included. What are the screening criteria?
5. Take a look at the returns. Make sure the investment has been around for at least some time. Look at the returns for the past several years.
6. Look at the fees.

Those are the steps I followed and I really enjoyed the experience! I made a couple of notes to myself because going through this process clarified some things for me- like the fact that I really don’t need a screener for alcohol, adult entertainment, and gambling. I guess I just want people to be able to have a good time lol.

So I hope you’ll figure out a process that works for you, and find out more about what you care about and what you really don’t.

If you’ve switched your investments to more socially responsible choices, I’d love to hear about it, please send your emails to progressive pockets at gmail dot com. I definitely want to hear what your experience is. Or if your financial advisor moved some of your investments over for you, I want to hear about that too.

I’m going to include a very light set of links today, I really want to be super clear that I am not providing financial advice to you today, I am just sharing what I did.

You might want to check out Episode 76: the surprising truth about what ESG investing actually means. I’ve gotten some positive feedback from listeners about that one, especially those of you who work in the financial sector. It was recorded before this show was rebranded so don’t be alarmed by that. Still me, still the same topics for the most part.

I have already started working on an issue of the newsletter where I am going to share more of the socially responsible investments that I have been following, yes I’m going to tell you the exact ticker symbols and provide links so you can look into them too. If you want to receive the newsletter, you can email progressive pockets at gmail dot com or go to the website progressive pockets dot com.

Welcome to the new listeners, one of the things that makes podcasts different than other media is that there really isn’t an algorithm that pushes content to people. So if you’re listening, you either heard me speak at a conference or in a meeting, or someone sent you an episode to listen to and you subscribed. So please pass it forward, please send this episode to someone who you think might enjoy it.

Let’s end with a quote, this one comes from Howard Zinn,

“We don't have to engage in grand, heroic actions to participate in the process of change. Small acts, when multiplied by millions of people, can transform the world.”

Let’s talk again soon!