This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.
Every now and then I am asked about ethical portfolios and whether or not they could become available through MoneyGeek Today, I'm happy to announce that they now are.
Just as in the existing regular portfolios, ethical portfolios are largely composed of Exchange Traded Funds (ETFs), which are cheaper and, I believe, better alternatives to mutual funds. (To learn more about ETFs, please read our free book.) However, unlike regular portfolios, the ETFs in ethical portfolios purposely avoid certain industries.
As of the time of this writing, the ethical portfolios offered by MoneyGeek exclude the following industries: tobacco, nuclear power, and weapons. Ideally, I would have liked to exclude more industries, such as gambling and adult entertainment, but doing so would have created a portfolio that contained only U.S. stocks. Unfortunately, as it stands, there is only one ethical ETF that consists of Canadian stocks, and none that I know of that consist of international stocks.
Note that from a strict investment perspective, I think regular portfolios will perform better than ethical portfolios.
Since there are no internationally focused ethical ETFs, I've decided not to include any international component in the ethical portfolios. This makes the ethical ETFs less diversified and hence riskier. If or when someone launches an internationally focused ethical ETF, I will include it in the ethical portfolios, but it could be a long time before that happens.
Additionally, many of the investments within regular portfolios follow the value investing approach, which has enabled regular portfolios to generate higher returns since inception. Investments within ethical portfolios don't follow the value investing approach.
Lastly, keep in mind that the size of the excluded industries is not very significant. U.S. tobacco stocks as a whole have a combined size of $400 billion, which may sound big, but is actually only 2% of the total U.S. stock market. Firearms stocks as a whole are much smaller at $2 billion. Thus, if you invest $10,000 in a typical U.S. stock ETF, only around $200 would go towards the aforementioned industries.
Still, I can understand if you don't want any of your money going towards tobacco, firearms or nuclear power industries out of principle. If that's the case, you might be interested in the ethical portfolios.
This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.
