When you invest in exchange-traded funds (ETFs), you can choose from a variety of different types. There are ETFs that track specific industries, as well as those that focus on specific geographies and even ones with a social or environmental focus.
However, choosing the right socially responsible ETFs to invest in isn’t always as straightforward as it might seem. There are many different considerations to take into account when investing in any kind of ETF.
What exactly should you look for? Read on to find out more…
One of the first things you should look for is whether the ETF has conducted a stakeholder risk assessment. This is a process which takes into account the entire supply chain of the ETF’s holdings. The idea is to address any potential negative impact the ETF may have on the environment and local communities.
This is the case even if the ETF’s holdings are in companies that the ETF is not invested in directly. For example, if the ETF’s holdings include a company that produces a large amount of pollution, the stakeholder risk assessment should take that into account. It should also look at the supply chain of that company to see where the pollution is going and if there is any way to mitigate that pollution.
The next thing to consider is how the ETF is ethical. In other words, how it ensures that its investments are socially responsible, ethical and meet certain standards.
ETFs can be ethical in a number of different ways. Some may invest in companies that meet certain standards of social and environmental responsibility. Some may also screen out companies that don’t meet those standards. Other ETFs may use an index that explicitly states that companies must meet certain standards in order to be included.
You can also check whether the ETF is listed on an exchange that has a code of ethics. This usually applies to the ETF’s manager and the fund’s custodian. You can also look at the investment advisor. This is the person who decides which companies the ETF invests in. Find out what criteria they use that guides their decision-making process.
Another thing to look at is the ETF’s holdings. Make sure you get a detailed breakdown of the different companies and industries that the ETF invests in. You can then see if they meet your ethical investment criteria.
You can also see if they are consistent with the ETF’s stated investment objective. ETFs usually have a specific investment objective. For example, some ETFs aim to provide a balance of income and growth. Other ETFs focus more on capital appreciation. Still others focus on income or have a focus on a specific sector.
Another thing to consider is the turnover rate and tracking difference of the ETF’s holdings. The turnover rate tells you how often the ETF’s manager changes the fund’s holdings. That said, you want to aim for low turnover rates. This is because frequent changes in the holdings can affect the fund’s performance.
Get a close look at the tracking difference as well. This is the difference between the ETF’s performance and the performance of the fund’s benchmark index. If you are investing in an ETF that tracks an index, you want to make sure that the ETF performs as closely as possible to that index. The lower the tracking difference, the better.
When choosing the right socially responsible ETFs to invest in, keep in mind that it’s not only about the social and environmental impact of the fund. It’s also about the performance of the fund.
The best ethical ETFs are those that have a positive impact on society as well as the investor. They also have low turnover rates and low expense ratios. This will help keep the fund’s performance consistent over time.