As more and more investors turn to socially responsible investing, so comes an increasing interest in Exchange Traded Funds (ETFs).
According to U.S. News, ETFs saw Assets Under Management (AUM) grow globally from about $200 billion in 2003 to more than $6 trillion in 2019. At PAX Financial Group, we’ve also seen a spike in popularity.
What is an ETF?
An ETF is a type of investment fund that is traded on stock exchanges. They are similar to mutual funds in a number of ways – they’re both low-cost, diversified ways of buying stocks, bonds and real estate – but unlike mutual funds, which are traded strictly based on the end-of-the-day price, ETFs are bought and sold throughout the day, when stock exchanges are open. Just like corporate or company stocks, ETFs have unique three-, four- or five-character ticker symbols, and you can track price data when stock exchanges are open. ETFs are usually affordable investment options because they traditionally offer lower fees than mutual funds.
ETFs are versatile and diverse, typically easy to trade and tax-efficient, making them ideal for many investors.
What is Socially Responsible Investing?
Socially Responsible Investing (SRI) allows investors to support companies, causes and values they believe in. Investments are strictly made in companies that either avoid unethical behavior, make socially responsible decisions on a consistent basis, or, even better yet, do both!
Socially responsible investing is sometimes also called sustainable, green or ethical investing. Closely related, there’s also a specific Biblically Responsible Investing movement that’s picking up steam and focuses specifically on Christian-based beliefs. (For more on what this looks like, check out our guide here.)
People who consider themselves social investors focus their investments in businesses and companies that publicly support social and environmental betterment; act as a positive force for change; treat their employees well and pay them fair wages; honor racial and gender diversity; and make or sell safe and healthy products and services.
Overall, there are a number of possible methods of social investing. One involves avoiding companies whose business dealings involve things like tobacco, gambling, firearms, fossil fuels and fast food, which are sometimes referred to as “sin stocks.” This type of socially responsible investing is known as a negative-screening process, because you filter out the objectionable companies from your investments.
Another method of social investing uses a positive-screening process, whereby you seek out to invest in organizations that not only refrain from practices you find questionable, but that actively do engage in practices that are ethical, sustainable, socially respectable and environmentally friendly.
Regardless of how you do it, socially responsible investing can be a win-win situation; while you watch your wealth grow, you are also promoting causes that are important to you.
Socially Responsible Investing in ETFs
Now, let’s put these two terms together: Socially responsible investing and ETFs.
Socially responsible ETFs are groups of assets with a related socially responsible theme, often a type of environmental, social justice or governance factor.
What identifies an ETF as a specifically socially responsible ETF is that the companies that are part of the fund have committed to corporate behaviors that are and will stay true to the established values.
The socially investing movement is expected to grow in popularity, and the socially responsible ETF market is expanding in tandem. The number of ETFs and mutual funds investing in companies screened for socially responsible principles has more than doubled since 2012.
In response to the rising demand for ETFs, asset managers are rolling out even more in 2021.
Socially responsible ETFs can be a great vehicle for beginner investors who want to make an impact with their funds. They often have lower fees than other investment types, and companies that fall into narrow category specifics, like clean energy, sustainability, female empowerment and human rights, allow investors to focus their investment into causes they feel strongly about.
Socially responsible ETFs, like other social investing strategies, enable investors to use their money to further causes that are important to them, in a way that also adds zeroes to their bank or retirement accounts.
If you’re interested in socially responsible or Biblically responsible investing, and therefore, ETFs, contact the financial advisors at PAX Financial Group. Personally, faith is very important to me, and the team at PAX Financial Group has welcomed this movement with open arms.
Investing in general can be complicated for the average investor who isn’t in the financial services industry. Socially responsible investing can make the task even more complex. Some ETFs, for example, may align with your values but aren’t a smart investment.
Here are 4 common pitfalls we see DIY investors make when trying to create a socially responsible portfolio:
- Not having a written plan: Once you’ve defined your investment purpose, write it down so you can return to it if you begin to feel uncertain. Part of your written plan should clearly state your reason for choosing each of the investments you hold. Why did you choose to purchase it in the first place? Knowing this can help you determine when and if you should sell it.
- Putting too many eggs in one basket: While it can be a good feeling to invest a lot in one area or in one company, it can be beneficial to separate your investments into different categories. For instance, you might have investments that are intended to generate income, others that are to create growth and still others to preserve your capital.
- Following the herd: Another bias DIY investors can fall victim to is the fear of missing out. It happens to all of us: We hear about someone else making money on an investment and think we should buy it, too. But the reality is what is good for our neighbor may not be good for us.
- Thinking too short-term: A lot of our clients’ financial goals are years or even decades in the future, and yet we often get caught up in short-term market fluctuations. If you’re investing for something that won’t happen for five, 10 or even 20 years in the future, it may not matter what the market does today. Keeping a long-term perspective can help you ignore the noise of daily market commentary and keep your eye on the goal.
Remember, even socially responsible investing is, well, investing! And any investment involves risk. When in doubt, ask a professional. It’s never a bad idea to run questions and investment possibilities by a financial advisor. And at PAX Financial Group, our team is here to help! Schedule a no-obligation, 15-minute call with our team today.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.