Do Indexes Force Us to Profit From [Unethical Activities]

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Do Indexes Force Us to Profit From [Unethical Activities]

Postby Scooter57 » Mon Jul 01, 2013 4:43 pm

I am very well aware of the arguments for investing in low cost Vanguard funds, and especially TSM, which I am currently doing. However, I am having some second thoughts about holding mutual funds as opposed to individual stocks that I am sure others here have also grappled with. The problem for me is that the indexes contain quite a few stocks whose business model depends on selling products that harm people--stocks whose management actively works to hide and deprecate just how dangerous their products might be. I'm primarily talking about tobacco, junk food, and Big Pharma

I was recently looking at the holdings of a fund I own which has performed very well for me, and was disturbed to see that it held a significant position in Amgen. For those who don't follow drug news, Amgen was recently convicted of a criminal count of marketing a drug off label to cancer patients which increases their chances of dying. The company knew that this drug was killing people, but continued to market it aggressively. This is not rumor. I have a personal contact who was in the room (guarded by armed guards) back when the news came out that this drug was killing people, where the company's top executives instructed their sales people on how to defuse doctor concerns about the reports of deaths associated with the offlabel use of this drug so as to keep them prescribing it. After being convicted of a criminal offense, Amgen paid a fine that was a tiny fraction of the profits it had made from this off label marketing. It was not barred from doing business with Medicare nor were any executives given any kind of punishment. In short, they killed people, took a slap on the risk, and continue to be very profitable.

This is very similar to what happened with Lilly who marketed a drug, Zyprexa, off label, though it has the ability to make people permanently diabetic. This happened to the teenaged daughter of a friend who was prescribed it for an off-label use.

So it's understandable that I don't want to share any of the profits Amgen earns, nor do I want any part of the profits of several other drug companies who are aggressively marketing drugs I have reason to believe are equally dangerous. Unfortunately, TSM and just about every other Vanguard Large Cap fund I can find holds significant holdings in the companies that make these drugs, too.

So I am asking myself, why is it that decent people who would risk their lives to save an old person in a burning building are willing to fund their retirements with the profits from companies that earn money by hastening far too many older people to their deaths? Is it any different letting an index fund buy the shares and share the profits, than it woudl be if I bought the stock myself?

And why is it that people who are very careful to watch their own health and to reach out to others to help them live healthier lifestyles have no compunctions about sharing the profits of companies like Coke, Pepsi, and Altria (Phillip Morris and chewing tobacco.) You wouldn't turn a neighbor on to heron, but when your index fund buys companies that sell addictive substances--often with strategies that sneakily target teens--it gets a pass.

I recognize that the companies that profit in ways that disturb me aren't the companies that profit in ways that may disturb you, but the point I'm getting at is that when we buy funds and particularly index funds, we end up sharing the profits of companies that we would never personally want to be associated with--companies that in many cases have a business model that requires them to sell products that harm people or violate our deeply held moral beliefs.

There are funds that supposedly invest in "socially responsible" companies but when I look into their holdings I see that they hold many companies that might recycle their garbage, and limit their use of fossil fuel, but sell products that kill people. Amgen is a top ten holding of the Calvert Equity Fund, which is supposed to be one of the top 5 socially responsible funds.

What are your thoughts on this issue. Does your own need for money as you get older justify turning a blind eye to exactly what is producing the profits of the companies that fill your index funds?

This sometimes makes me wonder whether, even though it isn't anywhere as effective an investment strategy, it might be more ethical for me to invest in 50 or more individual stocks whose business model does not disturb me, rather than putting my money in an index fund and linking my fortunes with companies whose business model depends on harming others and whose executives persist in marketing harmful products long after their harm has become apparent.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Quickfoot » Mon Jul 01, 2013 4:48 pm

You don't state an argument against index funds or mutual funds in general but about specific ones that invest in companies you don't like. The answer isn't avoiding index funds, it's in properly selecting funds that meet your needs. There are mutual funds and etfs that label themselves as socially responsible investors, they only invest in companies that are inline with their stated ideologies.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Alex Frakt » Mon Jul 01, 2013 4:48 pm

I believe you are looking for these: Socially Responsible Indices (from the bogleheads wiki).
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby G-Money » Mon Jul 01, 2013 4:51 pm

I think many people like the idea of socially responsible investing, and, if all else were equal, would do it in some form or another. But the problem is that all things are not equal.

First, there's the typical underperformance of SRI funds. Lots of threads on that.

Then, as you've noted, we all have different ideas of what is "socially responsible." While there are many varieties of SRI funds, there are not nearly enough to offer exposure to all the companies we'd want exposure to, while cutting out the exposure to those we don't.

I suppose one approach, which I absolutely do NOT endorse would be to buy the index funds, and simply short the "evil" stocks in an amount equal to the amount you own in your index funds. This is almost certain to be a losing proposition in the long run, but if it's the only way to appease your conscience, then so be it.

I think the majority view here is to invest passively in the entire market, but to contribute actively to the causes you support.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Scooter57 » Mon Jul 01, 2013 5:02 pm

As I pointed out in the post, the definition of socially responsible used by funds so defined includes big pharma companies. The criteria for selecting those indexes don't impress me.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Alex Frakt » Mon Jul 01, 2013 5:04 pm

Scooter57 wrote:There are funds that supposedly invest in "socially responsible" companies but when I look into their holdings I see that they hold many companies that might recycle their garbage, and limit their use of fossil fuel, but sell products that kill people. Amgen is a top ten holding of the Calvert Equity Fund, which is supposed to be one of the top 5 socially responsible funds.

What are your thoughts on this issue. Does your own need for money as you get older justify turning a blind eye to exactly what is producing the profits of the companies that fill your index funds?

This sometimes makes me wonder whether, even though it isn't anywhere as effective an investment strategy, it might be more ethical for me to invest in 50 or more individual stocks whose business model does not disturb me, rather than putting my money in an index fund and linking my fortunes with companies whose business model depends on harming others and whose executives persist in marketing harmful products long after their harm has become apparent.

If you find the SRI funds unacceptable, you quickly run into practical problems implementing a portfolio. How do you expect to learn enough about the operations of 50 companies to be sure that they violate none of your moral precepts? Even if you could somehow compile the list, do you have time to continuously monitor your selections?
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby G-Money » Mon Jul 01, 2013 5:05 pm

One more thing, a sort of philosophical bent (warning, I'm not actually a philosopher, so what follows may be complete rubbish):

I think there's a difference between primary and secondary intent. Primary intent meaning something you actively want to do, secondary intent meaning something you don't necessarily desire, but which you know comes about from doing something else you actively want to do.

You want to invest in stocks cheaply and efficiently. Mutual funds, and index funds in particular, are an excellent way to do that.

Now, you happen to know that investing in index funds will give you a stake in companies you don't like. Your goal is not to own those "bad" companies. You just want to get cheap and efficient exposure to stocks. If you determine that there is a way to cheaply and efficiently get exposure to stocks without investing in these "bad" companies, you should do so. If you determine that there is no other means to cheaply and efficiently get exposure to stocks, then you don't really have much choice about owning those "bad" companies. In that case, you end up investing in those companies, not because you want to, but because there's no other means of fulfilling your primary intent.

Of course, there is wiggle room. You could redefine "cheap" and "efficient" however you like. For many here, "cheap" is an ER <0.20%. But if you raise your "cheap" threshold to <0.75%, you probably increase your options for avoiding those "bad" companies significantly. Same with "efficient." Many here want exposure to thousands of companies in their market weight. If you redefine "efficient" to mean hundreds of companies, with no single company exceeding 5% of your portfolio, your options expand dramatically.

So, in the end, we each need to balance how strongly we feel about particular issues and companies on the one hand, and our standards for reaching our primary intent of cheap and efficient exposure to securities on the other. Different people will reach different conclusions on this, and there's no "right" way of thinking about it.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby umfundi » Mon Jul 01, 2013 5:08 pm

I don't think that index funds force anything. They invest in the total market. It is what it is.

Some wag in another thread pointed out there is a fund that invests only in gambling, alcohol, and tobacco, and which handily outperforms the socially responsible funds.

I think the best advice is to invest in the broad market, and contribute to (or boycott) your causes separately.

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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Clearly_Irrational » Mon Jul 01, 2013 5:09 pm

G-Money wrote:I think the majority view here is to invest passively in the entire market, but to contribute actively to the causes you support.


Ethically I don't think that's really sufficient if you're serious about it. Obviously it depends on your personal values, but I'd describe indexing as active support of their activities just as buying their products would be. The problem is that there aren't really any decent ethical choices, nearly any major business is going to be doing something unsavory. In order to implement this in any reasonable sort of way you'd need a fairly detailed methodology on how you were going to go about selecting companies, in fact I'd argue this is one case were holding individual stocks is probably the only answer.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby technovelist » Mon Jul 01, 2013 5:16 pm

I understand the ethical conundrum, but what about bonds or other securities issued by non-corporate entities who do evil things? It's pretty hard to avoid those...
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby jjbiv » Mon Jul 01, 2013 5:16 pm

How about using your charitable giving to compensate for what you perceive to be the evils perpetuated by those companies you would prefer to avoid? That strikes me as a much more efficient way to express your social views than through your investment holdings. Bear in mind that, to some extent, you are likely to disagree with a position or action of nearly every company of significant size. Not to be rude, but the likelihood of the market taking note of your lack of support of certain companies is very small. If there is money to be made, chances are high that someone will be happy to make it. If not you, someone else will gladly buy these shares. So how much good is actually done by you not buying them?
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby G-Money » Mon Jul 01, 2013 5:20 pm

Clearly_Irrational,

If we're talking about ethics, I think intent matters. See my second post on that score. Whether it's "sufficient". Oils down to priorities. Agree that if it's important enough, individual stock selection is probably the only way to go.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby umfundi » Mon Jul 01, 2013 5:24 pm

Clearly_Irrational wrote:
G-Money wrote:I think the majority view here is to invest passively in the entire market, but to contribute actively to the causes you support.


Ethically I don't think that's really sufficient if you're serious about it. Obviously it depends on your personal values, but I'd describe indexing as active support of their activities just as buying their products would be. The problem is that there aren't really any decent ethical choices, nearly any major business is going to be doing something unsavory. In order to implement this in any reasonable sort of way you'd need a fairly detailed methodology on how you were going to go about selecting companies, in fact I'd argue this is one case were holding individual stocks is probably the only answer.

Yes,

But can you live your life that way? Why stop at investing?

Let's take natural resources. Heat your house with natural gas? It is now dramatically cheaper because of fracking, whether the gas coming into your house was fracked or not. Do you buy gasoline? Trust me, you have no way to know where the gasoline at your local station (or Costco) comes from. Maybe you don't want to own BP or Exxon stock, but you have no way of knowing if you are using their products. Same thing for Dow Chemical.

In my opinion, causes are more local, and closer to home. Things you can directly influence.

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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Simplegift » Mon Jul 01, 2013 5:25 pm

Scooter57 wrote:Does your own need for money as you get older justify turning a blind eye to exactly what is producing the profits of the companies that fill your index funds?

Interesting philosophical question, but in practical life, one has to consider the scale of the harm done by investing in index funds. What percentage of Total Stock Market Fund's profits are being generated by the objectionable practices of its component companies? The answer is a very small number. To not invest in index funds because of this very small number would be like refusing to drive to the grocery store due to all the ants one's car will massacre in the roadway. Moral choices in life are nearly always nuanced, with shades of gray — and very rarely absolute.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Savvy » Mon Jul 01, 2013 5:26 pm

Do you buy from any grocery stores that sell cancer causing cigarettes? Do you buy from stores that sell gas which us bad for environment?
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Noobvestor » Mon Jul 01, 2013 5:32 pm

Do Indexes Force Us to Profit From Harming Others? Yes, just like driving a car, having a child, and not putting everything you own up for sale and giving the proceeds to charity. Really, where would one begin to draw the line?

This sometimes makes me wonder whether, even though it isn't anywhere as effective an investment strategy, it might be more ethical for me to invest in 50 or more individual stocks whose business model does not disturb me, rather than putting my money in an index fund and linking my fortunes with companies whose business model depends on harming others and whose executives persist in marketing harmful products long after their harm has become apparent.


Cost and probably tax-inefficient, not to mention you'll end up second-guessing yourself on every company the more you look into them. What if they are fine internally, but do business with Amgen? What if their social responsibility record is high, but they use a lot of oil? What if they produce great products at low costs, but test on animals? So many things to account for ...
'
And 50 stocks? Would that be enough? Bernstein says 'no' in http://www.efficientfrontier.com/ef/900/15st.htm

If the O’Neal data are generalizable to stocks, and I believe that they are, then even 100 stocks are not nearly enough to eliminate this very important source of financial risk.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Clearly_Irrational » Mon Jul 01, 2013 5:57 pm

G-Money wrote:Clearly_Irrational,

If we're talking about ethics, I think intent matters. See my second post on that score. Whether it's "sufficient". Oils down to priorities. Agree that if it's important enough, individual stock selection is probably the only way to go.


I know it bothers me, but the cost of avoidance is extremely high and my impact extremely low. For example, I shop at a well known low cost retailer who has great deals on cheap clothing. One of the reasons they have great deals though is that they employ what is essentially slave labor overseas. Do I stop shopping there and put a big hole in my clothing budget due to their reprehensible tactics? I can come up with an argument for not shopping at pretty much any of my normal locations so it becomes tough to figure out where to draw the line.
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Re: Do Indexes Force Us to Profit From Harming Others?

Postby Gleevec » Mon Jul 01, 2013 6:10 pm

Scooter57 wrote:As I pointed out in the post, the definition of socially responsible used by funds so defined includes big pharma companies. The criteria for selecting those indexes don't impress me.


Do you shop at any grocery store-- which will carry Nestle which is one of the worst ethical companies in the world?

Do you fill up gas-- which likely involved a major oil company taking advantage of a 3rd world company and likely working with a dictator?

Are you using a computer to type this-- which requires rare earth metals from China that are likely harvested using near slave labor conditions?

Or do you decide to invest in a nice clean little solar company-- like Solyndra?

No easy choices.
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Re: Do Indexes Force Us to Profit From [Unethical Activities

Postby LadyGeek » Mon Jul 01, 2013 6:14 pm

Let's stay on-topic, which is the investing part of Sustainable and Responsible Investing (SRI).

Check the references in the wiki: Social responsibility indices, e.g. The Forum for Sustainable and Responsible Investment
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Re: Do Indexes Force Us to Profit From [Unethical Activities

Postby dimdum » Mon Jul 01, 2013 7:01 pm

With TSM, you are investing in America, you live here, work here and investing here.
One way to deal with situation is donate the portion of investment profit to charity or cause to fight these big these corps.

I'll gave an example, its more complicated but lets say you invest 10K in TSM and gain 10% or 1K in a year.
Let's say pharma, alcohol and other evil corps are about 20% of index (approx).

That means 20% of 1K was generated from their profit. So donate 20% or 200$ and enjoy the low cost index.
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Re: Do Indexes Force Us to Profit From [Unethical Activities

Postby Scooter57 » Mon Jul 01, 2013 7:06 pm

Perhaps it is generational, but I don't feel burning oil rises to the same level of moral issue as selling tainted drugs. I have driven cars getting 40 mpg all my adult life on principle, and I do what I can to avoid buying products from companies who are up front about supporting what I feel are reactionary political candidates or issues, but I agree there is a limit to how far I can take things. I don't sew my own underwear or cobble shoes, so I am participating in the sweatshop economy to that extent.

I donate a lot of my time and energy to working to fight the abuses that disturb me already. Usually though sending money to charities seems more a feel goid thing than a do good thing. The track record of the big medical charities on alerting the public to drug problems is horrendous as they are so heavily funded by big pharma.

I am not decided on the subject of TSM, but it comes up each time I look at what is in the funds I hold. The fact that it is so easy to rationalize away the abuses performed by corporations because they give us a tiny bit of their profits does make me understand how tough it is to prevent profitable abuses.
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Re: Do Indexes Force Us to Profit From [Unethical Activities

Postby LadyGeek » Mon Jul 01, 2013 7:16 pm

This thread has run its course and is locked. See: Forum Policy

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Note the policy lists the above as examples. Corporate greed and ethics count for this thread.
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