New Vanguard Ethical Investment Funds

[FIPurpose]

Anyone else perked by this recent announcement from Vanguard?

https://investornews.vanguard/two-new-vanguard-etfs-for-socially-conscious-investors/

I'd be interested in switching over to ethical investments, but it will take some time for me to dig into what exactly this removes from the typical index fund.

Thoughts?

[Dancin'Dog]

I noticed that they still invest in crooked financial institutions.  How many times has Wells Fargo been fined?

[EvenSteven]

I generally disagree with what these types of funds consider ethical. I have nothing against pornography or craft beer. I am generally pro-nuclear power. Many of these funds take an anti-GMO stance, which I find to be harmful to the environment and developing countries.

[RedmondStash]

This is interesting. Thanks for posting.

I don't think any "ethical" investment fund will make everyone happy, but I'm intrigued by the fact that Vanguard is at least trying to take a stab at this.

[I'm a red panda]

I have some of my money in a TIAA Social Choice fund. I'll move it to Vanguard, as the expense ratios are lower.

[FIPurpose]

I noticed that they still invest in crooked financial institutions.  How many times has Wells Fargo been fined?

I was trying to find the investment list. Did you actually find where they're investing in Wells Fargo? It may still be too new of a fund to have an estimated holdings list.

[Dancin'Dog]

I noticed that they still invest in crooked financial institutions.  How many times has Wells Fargo been fined?

I was trying to find the investment list. Did you actually find where they're investing in Wells Fargo? It may still be too new of a fund to have an estimated holdings list.

No, but you can glance over the list of things they doen't invest in and see financial institutions aren't on the list.  If you look at their big funds list Wells Fargo is towards the top of the list, so you know they can't afford to toss a winner like that.  The "ethics" is about the products sold, not the ethics of the companies policies and actions.

[maizefolk]

I generally disagree with what these types of funds consider ethical. I have nothing against pornography or craft beer. I am generally pro-nuclear power. Many of these funds take an anti-GMO stance, which I find to be harmful to the environment and developing countries.

This.

"Ethical" funds also tend to lag the total market, so it can be more effective to invest in the total market, and then spend the difference in return between a total market and ethical fund supporting causes you care about. This approach also lets you make sure you are working towards the changes you personally truly do want to see in the world, rather than whatever is currently fashionable.

[libertarian4321]

If it makes money, it's "ethical" in my book. 

I don't need a bunch of goofy Social Justice Warriors choosing my investments.

I'll make money, then I'll donate to charities I like.  That is ethical.

[MustacheAndaHalf]

I don't need a bunch of goofy Social Justice Warriors choosing my investments.

I don't favor the label you used to describe Vanguard portfolio managers of an ethical mutual fund, but I happen to agree with the conclusion to cause change by donating - not by investing. 

The question I have is how will investing in these funds cause a company to change behavior?  On a certain day, you didn't buy some stock.  Was that because their P/E was too high, or because they don't meet your ethical standards?

I argue the company can't notice the lack of buying by individual investors, let alone know your specific motivation for not making a purchase of their stock.  And the danger is that you take your belief in something, do something with no impact, and are satisfied by that.

It's far better to use profits to donate to charities that help to raise the issues you want addressed, rather than silently not buy a company and hope they figure out why.  If you believe a company can figure out why... how would they do so?

[maizefolk]

I don't need a bunch of goofy Social Justice Warriors choosing my investments.

I don't favor the label you used to describe Vanguard portfolio managers of an ethical mutual fund, but I happen to agree with the conclusion to cause change by donating - not by investing. 

The question I have is how will investing in these funds cause a company to change behavior?  On a certain day, you didn't buy some stock.  Was that because their P/E was too high, or because they don't meet your ethical standards?

I argue the company can't notice the lack of buying by individual investors, let alone know your specific motivation for not making a purchase of their stock.  And the danger is that you take your belief in something, do something with no impact, and are satisfied by that.

It's far better to use profits to donate to charities that help to raise the issues you want addressed, rather than silently not buy a company and hope they figure out why.  If you believe a company can figure out why... how would they do so?

The other problem is that efficient markets work to buffer companies from even this moderate impact of ethical investing (with or without quotation marks).

If a significant amount of money flows into ethical funds, the prices of stocks which are considered ethical increase, and the long term expected return on investment of these stocks decreases, making them less attractive investments to investors not following the same set of criteria for stock selection. Those investors tend to invest less in "ethical" companies because they are less attractive investments, causing the stock price to decline back to its original equilibrium.

Similarly, stocks which are disallowed by ethical investing see their stock prices fall while their earnings and future prospects stay the same, making them more attractive investments to investors who are willing to invest in stocks without bias. Those investors buy more of these "unethical" companies because they are more attractive investments, causing the stock price to rise back to its original equilibrium.

[Travis]

I don't need a bunch of goofy Social Justice Warriors choosing my investments.

I don't favor the label you used to describe Vanguard portfolio managers of an ethical mutual fund, but I happen to agree with the conclusion to cause change by donating - not by investing. 

The question I have is how will investing in these funds cause a company to change behavior?  On a certain day, you didn't buy some stock.  Was that because their P/E was too high, or because they don't meet your ethical standards?

I argue the company can't notice the lack of buying by individual investors, let alone know your specific motivation for not making a purchase of their stock.  And the danger is that you take your belief in something, do something with no impact, and are satisfied by that.

It's far better to use profits to donate to charities that help to raise the issues you want addressed, rather than silently not buy a company and hope they figure out why.  If you believe a company can figure out why... how would they do so?

Is the point of an ethical fund to get companies to change?  I always thought it was so the investor could feel better.  On the list of things a corporation needs to worry about, I doubt getting a spot on a niche index fund is on there.

[FIPurpose]

There's a lot of "bro" investing science going on in here on why or why not ethical investing. I think people that have made claims as to the in/effectiveness of ethical funds need to actually post some studies or papers to actually prove their point. Don't just come here and list out a bunch of assumptions about how you think the market may or may not work.

[maizefolk]

There's a lot of "bro" investing science going on in here on why or why not ethical investing. I think people that have made claims as to the in/effectiveness of ethical funds need to actually post some studies or papers to actually prove their point. Don't just come here and list out a bunch of assumptions about how you think the market may or may not work.

As a general principle I object to the use of gendered insults on this forum. But do feel free to call me a jerk or an asshole if you like.

In terms of the yield lag of ethical funds vs total market funds, this doesn't require peer reviewed studies, the data in in the public domain. Consider VFTSX which is one of the oldest socially conscious index funds I could find, is managed by vanguard (so doesn't have the drag from high expense ratios you see in other funds) and, after excluding companies considered to not meet their ethical standards in invested following a large cap blend strategy. Let's compare that to the performance of the S&P 500 reference index:



Over the past 18 years or so, a total stock market index has approximately doubled, while the vanguard socially conscious index fund that tracks roughly the same set of stocks is up approximately 75% 80%.

Now I'll be the first to acknowledge that if you only look at the last several years, ethical funds have tended to match or even exceed the indexes, as a great deal of the growth in the stock market recently has come from the FAANG stocks, which tend to make it past most of the ethical filters, which means ethical funds happened to be overweight tech* while tech is hot. However, honestly, even 18 years is a relatively short time period to draw significant conclusions, so I would be very cautious about assuming the last several years worth of returns reflect the permanent disappearance of the previously observed yield penalty.

*Well now tech AND communications after the way the S&P rearranged their sector weightings last week.

[FIPurpose]

As a general principle I object to the use of gendered insults on this forum. But do feel free to call me a jerk or an asshole if you like.

There's a reason that the term "broscience" is gendered. It's pretty much men doing it. Seemed a pretty apt comparison, though my use of it has nothing to do with what gender I think anyone is here.

To the rest of your post, you only address one aspect of ethical investing. Plus I don't think the tracking of one example of an ethical index fund really gives an answer to the ROI question either.

This still leaves open the question: what are the effects on businesses left outside of these indices? How many businesses cite these funds as a motivation to their behavior? What are the "social dividends" that come from funding these companies?

Is my investment in anyone individual company going to make a noticeable difference in anything? No. But that doesn't answer the question of the effectiveness or consequences of what a large index fund like this can have.

[maizefolk]

As a general principle I object to the use of gendered insults on this forum. But do feel free to call me a jerk or an asshole if you like.

There's a reason that the term "broscience" is gendered. It's pretty much men doing it. Seemed a pretty apt comparison, though my use of it has nothing to do with what gender I think anyone is here.

So what you're saying is it is okay to used gendered insults as long as you think the stereotypes that lead to the insults being gendered in the first place are true?

To the rest of your post, you only address one aspect of ethical investing. Plus I don't think the tracking of one example of an ethical index fund really gives an answer to the ROI question either.

You asked for us to provide data to back up our assertions, I provided the data that lead me to that conclusion. I'm happy to agree it isn't completely conclusive, so if you are aware of contradictory results from more funds and/or a long time period I'm happy to have my mind changed.

This still leaves open the question: what are the effects on businesses left outside of these indices? How many businesses cite these funds as a motivation to their behavior? What are the "social dividends" that come from funding these companies?

The first is an excellent question. I've already posted my understanding of what conventional efficient market theory would predict to be the answer for the first of them, but if you have either a different interpretation you'd like to propose, flaws in the reasoning I described you'd like to point out, or evidence that is inconsistent with the predictions of that model let me know. Again I'd be happy to be proven wrong here.

The second seems less informative, as businesses which are already going to change their behavior are certainly going to cite socially conscious investing in order to tap in to good will. To me it seems like it could be more informative to see evidence that average business behavior changes in desirable ways as the amount of money invested in socially conscious funds increases.

The third presupposes that there are in fact social dividends from investing more money in socially conscious index funds, which is one of the points where I feel we haven't seen much evidence.

One of the great things about this forum is that we can understand a lot of the concepts that underly FIRE better by having our initial beliefs, logical models, or even evidence we think is solid challenged, so please do disagree with me and explain why you think I'm wrong. Just don't fall back on using gendered language to do so.

[FIPurpose]

I haven't really made up my mind yet on the topic on way or the other so I'm really trying to use this thread as a way to source more info. One site I did find was to a number of recent papers on the topic:

http://investingforthesoul.com/Main%20Pages/ethical-investing-CSR-research-studies.htm

I may peek at a few of these, but I don't have time to read them now. But I hope some here might find some use in the page to support their hypothesis.

Sorry. I don't have a well thought out opinion on this.

[the_gastropod]

If it makes money, it's "ethical" in my book. 

Really? Blood diamonds are fine? Volkswagen made a lot of money skirting EPA regulations. That was ethical? Slavery was once legal and quite a profitable endeavor. Ethical? Nestlé's infant formula scam was ethical? The American Petroleum Institute (dirtily) fought Clair Patterson for decades over the clear evidence that leaded gasoline was poisoning the atmosphere. Was that ethical?

Milton Friedman was a smart man. But he was demonstrably wrong about ethics in business. Profit != ethical.