Changing to Vanguard Socially Responsible ETFs

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Topic Author
workingonit
Posts: 22
Joined: Fri Mar 31, 2017 11:22 am

Changing to Vanguard Socially Responsible ETFs

Post by workingonit » Thu Jul 30, 2020 1:58 pm

Hi,

I have a 4-fund index investment strategy:
1. 75% stocks, which itself is 75% US VTSAX and 25% International VTIAX
2. 20% bonds, which is also 75% US VBTLX and 25% International VTABX
3. 5% cash

I am considering shifting my stock allocation to Vanguard's Environmental, Social and Governance (ESG) ETFs:
https://investornews.vanguard/explore-e ... C:POS01:XX

I don't really want to debate whether Socially Responsible Investing itself is a good or bad idea or need help on my portfolio allocation, but I'd like others' feedback on comparing the pros and cons of the current funds to the ETFs:
1. VTSAX to ESGV: https://www.morningstar.com/etfs/bats/esgv/portfolio
2. VTIAX to VSGX https://www.morningstar.com/etfs/bats/vsgx/quote

My assessment:
  • The ETFs are based on a smaller list of companies (about half for each), but still thousands.
  • I'm lowering Energy, Utilities and Industrial investments and increasing Financial, Communication, Healthcare and Technology.
  • Dividends are slightly lower because of this trade.
  • Both of these would tend to increase my volatility, but they (a) have similar stock style weightings (the Morningstar box - small/medium/large vs. value/blend/aggressive) and (b) for the admittedly short history, they have tracked each other closely.
My questions:
  • Will the hit on dividends in theory be made up for in general returns?
  • Is there a way to measure the increased volatility given the short history of the ETFs?
  • Is this a big change to my investments or am I'm still playing on the margins given the indexing nature of both across thousands of companies?
  • Any chance I can avoid Capital Gains with a conversion like this article mentions?
https://www.doughroller.net/investing/m ... -fund-etf/
  • What's different about a mutual fund vs. an ETF for long-term investing and retirement?
  • Other things I haven't thought about?

petulant
Posts: 1496
Joined: Thu Sep 22, 2016 1:09 pm

Re: Changing to Vanguard Socially Responsible ETFs

Post by petulant » Thu Jul 30, 2020 2:07 pm

Have you carefully reviewed their particular ESG criteria or the company issuing it? Different investors care about particular ESG issues, and you should make sure their criteria match your own.

donaldfair71
Posts: 603
Joined: Wed Mar 06, 2013 4:15 pm

Re: Changing to Vanguard Socially Responsible ETFs

Post by donaldfair71 » Thu Jul 30, 2020 2:27 pm

workingonit wrote:
Thu Jul 30, 2020 1:58 pm
Hi,

I have a 4-fund index investment strategy:
1. 75% stocks, which itself is 75% US VTSAX and 25% International VTIAX
2. 20% bonds, which is also 75% US VBTLX and 25% International VTABX
3. 5% cash

I am considering shifting my stock allocation to Vanguard's Environmental, Social and Governance (ESG) ETFs:
https://investornews.vanguard/explore-e ... C:POS01:XX

I don't really want to debate whether Socially Responsible Investing itself is a good or bad idea or need help on my portfolio allocation, but I'd like others' feedback on comparing the pros and cons of the current funds to the ETFs:
1. VTSAX to ESGV: https://www.morningstar.com/etfs/bats/esgv/portfolio
2. VTIAX to VSGX https://www.morningstar.com/etfs/bats/vsgx/quote

My assessment:
  • The ETFs are based on a smaller list of companies (about half for each), but still thousands.
  • I'm lowering Energy, Utilities and Industrial investments and increasing Financial, Communication, Healthcare and Technology.
  • Dividends are slightly lower because of this trade.
  • Both of these would tend to increase my volatility, but they (a) have similar stock style weightings (the Morningstar box - small/medium/large vs. value/blend/aggressive) and (b) for the admittedly short history, they have tracked each other closely.
My questions:
  • Will the hit on dividends in theory be made up for in general returns?
  • Is there a way to measure the increased volatility given the short history of the ETFs?
  • Is this a big change to my investments or am I'm still playing on the margins given the indexing nature of both across thousands of companies?
  • Any chance I can avoid Capital Gains with a conversion like this article mentions?
https://www.doughroller.net/investing/m ... -fund-etf/
  • What's different about a mutual fund vs. an ETF for long-term investing and retirement?
  • Other things I haven't thought about?
To answer your bulleted questions at the end of your post:

1. No one can answer this other than to venture a guess.

2. You can always measure in hindsight, but even with a long history eventually to look back on, what is past isn’t always prologue.

3. This is all relative and an opinion. I think it’s big change because it signifies a clear divider between what you find acceptable and unacceptable (outside of the standard returns/fees/diversification/etc). If you stick with it, you’ll always have to be more hands on than a simple few total market funds.

4. Didn’t notice an article but I don’t know how you could avoid taxes if you sell rather than convert to a different share class of the same fund.

5. Being comfortable with ETFs really comes down to becoming comfortable with a little bit more manual buying, at least at Vanguard. You can’t automate it as much. You should learn about limit orders as well. But it’s not greatly daunting.

One last consideration? Are you committed to holding these funds as the bigger, more mainstream total market funds outperform at times. I think there will be tracking error to the total market you’d be giving up, and you’ll always compare them in the future. Will you be committed when you’re trailing by a few % a year for a few years. I’m not predicting these will lag. But when they do lag is when that will is tested.

Topic Author
workingonit
Posts: 22
Joined: Fri Mar 31, 2017 11:22 am

Re: Changing to Vanguard Socially Responsible ETFs

Post by workingonit » Fri Jul 31, 2020 12:15 pm

Donald,

Thanks for your response.

On #3, how is managing two index ETFs more difficult than managing two index mutual funds?

I researched a bit deeper:

The Vanguard ESGV ETF is based on the FTSE US All Cap Choice Index, which screens out from the FTSE US All Cap Index.

It's not clear to me how the "All Cap" index (https://research.ftserussell.com/Analyt ... nual=false) (PDF) differs from their "Total Market" index (https://research.ftserussell.com/Analyt ... nual=false) (PDF) but it includes about 2000 less equities. I'll have to dig into that.

Incidentally, here is a return graph for ESGV, VTSAX, and the FSTE Index, which all track very closely (for < 2 years admittedly).

Image

Wind_Reaver
Posts: 104
Joined: Mon Jan 05, 2009 3:15 pm

Re: Changing to Vanguard Socially Responsible ETFs

Post by Wind_Reaver » Sat Aug 01, 2020 1:18 pm

workingonit wrote:
Thu Jul 30, 2020 1:58 pm
  • Will the hit on dividends in theory be made up for in general returns?
Companies meeting ESG screens tend to exhibit a growth profile, hence the lower dividends.
workingonit wrote:
Thu Jul 30, 2020 1:58 pm
  • Is there a way to measure the increased volatility given the short history of the ETFs?
The ETF Database ETF Screener contains a risk tab which displays metrics like beta and volatility.
workingonit wrote:
Thu Jul 30, 2020 1:58 pm
  • Is this a big change to my investments or am I'm still playing on the margins given the indexing nature of both across thousands of companies?
petulant wrote:
Thu Jul 30, 2020 2:07 pm
Have you carefully reviewed their particular ESG criteria or the company issuing it? Different investors care about particular ESG issues, and you should make sure their criteria match your own.
Petulant's post above is something to consider. Before ESG, there was SRI (which are different methodologies). In the future, something else. The industry appears to have decided the S in ESG now stands for social instead of the original sustainable metric. The marketing material for the sustainable case is still available on the iShares site. What is sustainable investing?
workingonit wrote:
Thu Jul 30, 2020 1:58 pm
  • Any chance I can avoid Capital Gains with a conversion like this article mentions?
https://www.doughroller.net/investing/m ... -fund-etf/
The Vanguard ESG ETFs appear to be a stand alone share class. The Vanguard traditional fund version is actively managed and technically a separate fund.
workingonit wrote:
Thu Jul 30, 2020 1:58 pm
  • What's different about a mutual fund vs. an ETF for long-term investing and retirement?
ETF structure is expected to be more tax-efficient within taxable accounts.
workingonit wrote:
Thu Jul 30, 2020 1:58 pm
  • Other things I haven't thought about?
William 'Bill' Bernstein discussed ESG investing with William 'Bill' McNabb at the 2019 Bogleheads Conference Fireside Chat.
The ESG segment begins at the 39:23 mark.

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abuss368
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Re: Changing to Vanguard Socially Responsible ETFs

Post by abuss368 » Sat Aug 01, 2020 1:19 pm

There is a lot out there on the weighting of ESG funds. More than I at first appreciated. I was reading a little on this in The Wall Street Journal.
John C. Bogle: Two Fund Portfolio - Total Stock & Total Bond - “Simplicity is the master key to financial success."

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