Hellbent on sustainability funds - which ones?

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Ultralight Hiker
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Joined: Mon Jun 04, 2012 8:04 pm

Hellbent on sustainability funds - which ones?

Post by Ultralight Hiker » Mon Feb 05, 2018 9:25 pm

Hello Bogleheads!

My father wants to move all his equities (and possibly his bonds) to sustainability index funds.

This post is not about whether or not this is a good idea. I'm pretty sure it isn't, for a variety of reasons have have been discussed on Bogleheads many times before. But since he's committed to doing it, I wanted to help him identify the most diversified, lowest fee funds available.

At the very least, he should have an international fund, and the "style box" breakdown of his portfolio should be similar to VG Total Stock Market (e.g. include mid/small caps and value, not just large cap growth).

Here are a few funds that I identified:
  • FTSE Social Index Fund Investor Shares (VFTSX), .21 expense
  • Fidelity U.S. Sustainability Index Fund (FENSX), .20 expense
  • Fidelity International Sustainability Index Fund (FNIYX), .3 expense
  • DFA International Sustainability Core 1 Portfolio (DFSPX), .38
  • DFA US Sustainability Core 1 Portfolio (DFSIX), .25
Now imagine that you had a 401k that ONLY offered these and similar funds. Which funds would you recommend and in what proportions to roughly mimic the risk/return characteristics of total stock market index funds?

Thanks!
ULH

harmony
Posts: 493
Joined: Sun Nov 24, 2013 1:35 am

Re: Hellbent on sustainability funds - which ones?

Post by harmony » Tue Feb 06, 2018 12:19 pm

Go to Morningstar’s free Instant X-Ray tool. Enter the ticker for Total Stock Market to find out the style box and other values for that fund. Open another window with M* Instant X-Ray where you can enter the sustainable fund tickers that are available to your father in his 401k. Keep editing the percentages of each of these funds until it nearly matches the style box and other values for Total Stock market. You can compare: sector weightings; domestic and international; and cap size with VG Total Stock Market

Depending on the screens, you should expect the sustainable funds may be lower in Energy and higher in Technology (where sustainable alternative energy is often found). If a sustainable index fund screens out tobacco and alcohol in the Consumer Defensive sector, your father could compensate with a slightly higher value in another defensive sector such as Health Care.

For a long while there was no sustainable mid-cap index fund. (I've used actively-managed Parnassus Mid-cap). Nuveen now offers sustainable mid-cap ETFs (NUMV and NUMG). ETFs require a brokerage (not a 401K) for trading. A work-around would be to hold these mid-cap ETFs in his taxable account until he retires and then has the freedom to move the larger account to a brokerage.

I use my own spreadsheet for tracking all of the above which I update before re-balancing to make sure I am closely aligning with the world stock market. My spreadsheet allows me to more effectively run several scenarios before I re-balance. I also need to regularly update the sector weightings columns for each fund I own. For my measuring stick columns, I use Fidelity’s US sector weightings for domestic and MSCI World Index for global. You could use one or two Vanguard funds as your measuring stick/s.

Your list doesn’t mention TIAA so perhaps those funds aren’t available to your father. If they are, he has some excellent fund choices there. TIAA has a fossil-free fund, in addition to large blend and international in the sustainable category. I regularly run TIAA’s tickers through fossilfreefunds.org to see how much fossil fuel is included in each of the TIAA funds that I am invested in.

Individual stock overlap is more likely to happen with sustainable investing funds. I try not to allow any one company to be more than 5% share of my total equities. TD Ameritrade’s free morningstar instant x-ray features the tool which allows me to see the percentages of each company I hold. I can’t find this feature on Morningstar (but then I haven’t ever signed up for free M*).

In early October Barron's publishes a list of top-performing sustainable funds. The percentage of sustainable funds out-performing the S&P 500 increased from 2016 to 2017. However, many of these top-performing funds were more heavily weighted in typically clean energy sectors, i.e. Technology, which makes them out of balance with the rest of the stock market sector weightings.

Your father may be better informed after reading this Barron’s article: “Sustainability Ratings Tell Half the Story”by Lewis Braham https://www.barrons.com/articles/sustai ... 1507350027

Ultralight Hiker
Posts: 28
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Re: Hellbent on sustainability funds - which ones?

Post by Ultralight Hiker » Sat Feb 10, 2018 7:36 pm

harmony wrote:
Tue Feb 06, 2018 12:19 pm
Go to Morningstar’s free Instant X-Ray tool. Enter the ticker for Total Stock Market to find out the style box and other values for that fund. Open another window with M* Instant X-Ray where you can enter the sustainable fund tickers that are available to your father in his 401k. Keep editing the percentages of each of these funds until it nearly matches the style box and other values for Total Stock market. You can compare: sector weightings; domestic and international; and cap size with VG Total Stock Market
Thanks, this is a good tip... but also sounds too complex for my father. Is there no simple 2-3 fund solution? His SEP 401k is with Vanguard right now.

ULH

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BL
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Re: Hellbent on sustainability funds - which ones?

Post by BL » Sat Feb 10, 2018 7:42 pm

I Googled "vanguard sustainability" and got some funds. I know nothing about these funds.

JBTX
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Re: Hellbent on sustainability funds - which ones?

Post by JBTX » Sat Feb 10, 2018 7:49 pm

Ultralight Hiker wrote:
Sat Feb 10, 2018 7:36 pm
harmony wrote:
Tue Feb 06, 2018 12:19 pm
Go to Morningstar’s free Instant X-Ray tool. Enter the ticker for Total Stock Market to find out the style box and other values for that fund. Open another window with M* Instant X-Ray where you can enter the sustainable fund tickers that are available to your father in his 401k. Keep editing the percentages of each of these funds until it nearly matches the style box and other values for Total Stock market. You can compare: sector weightings; domestic and international; and cap size with VG Total Stock Market
Thanks, this is a good tip... but also sounds too complex for my father. Is there no simple 2-3 fund solution? His SEP 401k is with Vanguard right now.

ULH
It seems like you want somebody to do all of the work for him/you.

Try google.

https://www.kiplinger.com/slideshow/inv ... index.html

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sunnywindy
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Location: Wilmington, NC

Re: Hellbent on sustainability funds - which ones?

Post by sunnywindy » Sat Feb 10, 2018 7:51 pm

The iShares suite of "Optimized" ETFs follow the MSCI ESG Focus Index and it is designed to match the market in performance and volatility, just with highly rated ESG holdings. Has US, Intl, and EM offerings for cheap!

https://www.msci.com/msci-esg-focus-indexes
Powered by chocolate!

beardsworth
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Re: Hellbent on sustainability funds - which ones?

Post by beardsworth » Sat Feb 10, 2018 9:39 pm

You could check out Northern Global Sustainability Index Fund (NSRIX). It will, however, lean toward large company stocks. I don't own it, but have been watching it for a while.

Expense ratio is 0.31% with current small waiver, 0.35% without.

https://www.northerntrust.com/wealth-ma ... ndex/NSRIX

On the bond side, Northern has the usual version of a total U.S. bond index, a total Treasury Index (something I haven't seen from most other companies), and assorted other offerings.

harmony
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Re: Hellbent on sustainability funds - which ones?

Post by harmony » Sun Feb 11, 2018 1:08 am

Does your father have access to the brokerage platform at Vanguard for his SEP 401k? If so, he has access to many screened ETFs. The best place I’ve found for tracking the ever-expanding number of these is at etfdb.com. At that site, enter “Socially Responsible ETF List” in the search window. There are now 47 ETFs on this list, but they may not all fit your father’s definition of sustainable.

You can use the column header tools at etfdb.com to sort the list according to data like Expense Ratio, Assets Under Management and Trading Volume. If you find using the top-of-column sorters isn’t working immediately, try progressing to the next page and then back again to get the columns to re-sort. (Refreshing the current page alone isn’t usually enough to make the sorter work.)

For the type of screening and a description of the index the fund uses, your father will need to read each fund’s literature. For example, does he want a fund with primarily positive screens (ESG) or does he also want negative screening (SRI)? Even if the fund follows an index, it will follow a screened index; so your father might like to know what is being screened in or out. As has often been pointed out, the definition of sustainable can vary. This is not a reason to avoid sustainable investing. Instead your father can use these differences to find funds with screens that match his intent the most closely. With the expanding universe of sustainable funds, it is not difficult to find a suitable combination. If I were to suggest 2-3 funds, they would fit me but maybe not your father.

Ultralight Hiker
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How does this 3 fund "low carbon" portfolio look?

Post by Ultralight Hiker » Tue Feb 13, 2018 8:57 am

Thanks everyone for your helpful suggestions.

I think I've identified a portfolio that will allow my father to maintain something similar to his current asset allocation but with low-carbon funds.

60% iShares MSCI ACWI Low Carbon ETF (50/50 domestic international) .2 expense ratio
25% SPDR S&P 500 Fossil Fuel Reserves Free ETF .25 expense ratio
15% Vanguard Extended Market Index Fund .08 expense ratio

This will keep him at 70/30 domestic/international and approximates the "style boxes" of the total market. It has less exposure to energy sector but otherwise is quite well diversified.

How does this sound? Is there anything else we should be considering?

UlH

harmony
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Re: Hellbent on sustainability funds - which ones?

Post by harmony » Tue Feb 13, 2018 12:23 pm

Ultralight, good to see what you have come up with. I take it that your father defines sustainability as the absence of fossil fuel stocks given that this is how you have proceeded. Have you checked the carbon intensity of these ETFs with the online screening tools at either fossilfreefunds.org or etf.com? The screeners at these sites were discussed yesterday in the ETF SRI Allocation thread. I was involved in that discussion and wondered if you might have seen the links that we were posting there.

I used etf.com to order the “socially responsible” ETFs according to carbon intensity. (I had to use the Socially Responsible list instead of ESG list to get the most inclusive listing of all of the low-carbon ETFs.) Then I took the lowest carbon ETFs (including yours and two Nushares ETFs) over to fossilfreefunds to find out the $$ of fossil fuel stocks / $10,000 invested. There are five types of fossil fuel stocks that can be screened out at fossilfreefunds. You can easily adjust which ones to screen out. I screened all five types of fossil fuel stocks for this modeling. As a third check, I compared each ETF with Morningstar's Globe Sustainability Ratings.

$724 / $10,000 - CRBN - iShares MSCI ACWI Low Carbon ETF

$587 / $10,000 - SPYX - SPDR S&P 500 Fossil Fuel Reserves Free ETF

$259 / $10,000 - NULG - NuShares ESG Large-Cap Growth ETF

NULG has a 5 Globe M* Sustainability Rating, while SPYX has 4 Globes and CRBN has 3 Globes.

$675 / $10,000 - VXF - Vanguard Extended Market Index Fund (Mid-Cap Blend, leaning Growth)

$0 / $10,000 - NUMG - NuShares ESG Mid-Cap Growth ETF

NUMG has a 5 Globe M* Sustainability Rating, while VXF has 2 Globes.
VXF has no sustainability mandate meaning that it is not required to screen out fossil fuels.

I didn't model NULG or NUMG in a style box with the other ETFs. Percentages can be edited endlessly; and over time, they would drift anyway. Certainly you would be wise to get and keep a combination which would approximate current market weightings.

You noted the low Expense Ratios for the funds that you identified. I realize Nushares ETFs have a bit higher ER. While it is possible to quantify what your father would be getting for this higher ER, this is very much a values decision for him to make. I suggest that you share the ER information and the fossil fuel stocks $S / $10,000 information with your father. Then he can decide what to do.
Last edited by harmony on Tue Feb 13, 2018 3:21 pm, edited 2 times in total.

3funder
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Re: Hellbent on sustainability funds - which ones?

Post by 3funder » Tue Feb 13, 2018 12:42 pm

VFTSX and FNIYX; however, if you want a more substantial small and mid-cap flavor, DFSIX and DFSPX would be the way to go.

harmony
Posts: 493
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Re: Hellbent on sustainability funds - which ones?

Post by harmony » Tue Feb 13, 2018 1:10 pm

Mutual funds can also be analyzed at fossilfreefunds. Supposedly they were no longer offering data for international funds due to the expense of the data; but I entered FNYIX and DFSPX and got some results. I again screened for all five types of fossil fuel stocks:

$379 / $10,000 - VFTSX - Vanguard FTSE Social Index Fund (Large Blend) - M* 4 Globes

$985 / $10,000 - NSRIX — Northern Global Sustainability Index Fund (Large Blend) - M* 5 Globes

$0.00 / $10,000 - GCEQX - Green Century Equity Fund (Large Growth) follows KLD400 Ex Fossil Fuels Index – M* 5 Globes
$0.00 / $10,000 - GCINX - Green Century MSCI International Index Fund (Foreign Large Blend) - M* 5 Globes

$882 / $10,000 - FENSX - Fidelity® US Sustainability Index Fund (Large Blend) – M* 5 Globes
$919 / $10,000 – FNYIX - Fidelity® Intl Sustainability Index Fund (Foreign Large Blend) - M* 5 Globes

$321 / $10,000 - DFSIX - DFA U.S. Sustainability Core 1 Portfolio (Large Blend) - M* 2 Globes
$317 / $10,000 - DFSPX - DFA International Sustainability Core 1 Portfolio (Foreign Large Blend) - M* 3 Globes

$183 / $10,000 - ETHO - Etho Climate Leadership U.S. ETF (Mid-Cap Growth) – M* 4 Globes

The Nushares ETFs below get a maximum of 5 Globes from M*. The two value ETFs (NULV and NUMV) are higher in fossil fuels. The Morningstar Sustainability Rating is more complex than a %age of fossil fuel stocks, and it is not as transparent as fossilfreefunds.

$259 / $10,000 - NULG - NuShares ESG Large-Cap Growth ETF
$1277 / $10,000 - NULV - NuShares ESG Large-Cap Value ETF
$0.00 / $10,000 - NUMG - NuShares ESG Mid-Cap Growth ETF
$965 / $10,000 - NUMV - NuShares ESG Mid-Cap Value ETF
$543 / $10,000 – NUSC - NuShares ESG Small-Cap ETF
$409 / $10,000 - NUDM - NuShares ESG International Developed Markets Equity ETF

The iShares ETFs below also each merit a Morningstar 5 Globe Sustainability Rating, despite the %age of fossil fuel stock holdings.
The Optimized suite of iShares ETFs has the lowest Expense Ratios of any of the mutual funds or ETFs which I've posted here.

$571 / $10,000 - DSI - iShares MSCI KLD 400 Social ETF (Large Blend)

$900 / $10,000 - ESGU - iShares MSCI USA ESG Optimized ETF (Large Blend)
$1052 / $10,000 - ESGD - iShares MSCI EAFE ESG Optimized ETF (Foreign Large Blend)
$697 / $10,000 - ESGE - iShares MSCI EM ESG Optimized ETF (Diversified Emerging Markets)

All these funds have a Sustainability Mandate with an ESG Focus (except DFA has an Environmental Focus) according to Morningstar.

Another agile ETF comparison tool can be found at http://etfdb.com/tool/etf-comparison/. Say you want to compare which ETF, LOWC or SPYX, has more Philip Morris. Or say you want to find out if ESGU or ESGD has alcohol holdings. Enter both tickers in the etfdb Head-to-Head comparison tool. First you will get an overview of basic information. Double click on "Holdings" to get a %ile breakdown of the top 10, 15, and 50 holdings. At the very end of that list, you will find two easily searchable lists of each ETF’s individual holdings. It is easier to search this way than keeping two separate windows of ETF holdings lists open and scrolling.

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