One of the easiest ways to get started with ethical investing is to buy publicly traded exchange traded funds (ETFs). Today I’m going to look at 3 of my favourite “ethical ETFs” for beginner investors, and explain why I would choose them if I wanted a “hands off” approach to ethical investing.
How Do Get Started With Ethical Investing?
One of the easiest ways to get started with ethical investing is to simply buy exchange traded funds, called ETFs. The advantage of ETFs is that they have lower fees than most ethical investment funds, and you can buy and sell them with a brokerage account, such as those offered by Selfwealth, CommSec, and Nabtrade. The disadvantage is that they generally just track a simple index, so they may not perform as well as if you happened to choose a good ethical fund manager. Identifying a good fund manager is far from easy, since fund managers add no value on aggregate — for every winner there is a loser. That makes ETFs a great place to start for a beginner ethical investor.
This post is only intended as a starting point for your research. If you are in need of a financial advisor, you should contact a professional advisor, because this is not financial advice. However, it is important to be aware that some advisors are incentivised to put clients into high-fee products (for which they get a kick back). A good advisor should at least mention a low cost ethical ETF as one of your options. That said, there are good ethical funds, and I personally do invest with some fund managers. However, that is a more advanced subject, best kept for another day.
Vanguard Ethically Conscious International Shares Index ETF (ASX: VESG)
ASX:VESG is a stock standard global ETF that avoids fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons and adult entertainment. One advantage of this ETF is that it is one of the lowest cost ethical investing ETFs around, with management fees of just 0.18% per annum. If you invest in ASX:VESG, the biggest underlying holdings will be companies like Apple, Microsoft, Amazon, Alphabet, Facebook and Tesla. This is a good basic, broad-based, ethical investing ETF with almost 1600 underlying holdings. This is probably the “safest” of the three options discussed today.
BetaShares Global Sustainability Leaders ETF (ASX: ETHI)
ASX:ETHI is another ASX Listed, global shares ethical ETF. With management fees of 0.49% per annum, ASX:ETHI is a little more expensive than ASX:VESG. I like Betashares Global Sustainability Leaders ETF because it more closely aligns with my own ethics than does ASX:VESG, as it invests in top 200 Climate Leaders. This means it avoids investing in companies that are substantially exposed to fossil fuel industry activities. My understanding, then, is that ASX:ETHI would not be investing in a company that was financing coal mines, whereas VESG may well be.
This more stringent ethical filtering shows in the constituents. ASX:ETHI does not include Facebook shares in its top 10 holdings, but does include Apple, Adobe, Paypal and Nvidia. At the time of writing, the IT sector makes up over 38% of the porfolio, compared to only about 26% for VESG. This is my favourite basic ethical investing ETF on the ASX, but do note it has a slightly higher fee. With 200 constituents this is a reasonably diversified ETF, but it is not as broad as VESG.
Betashares Global Cybersecurity ETF (ASX: HACK)
ASX:HACK isn’t strictly speaking an “ethical ETF” since it invests in the 40 constituents of the Nasdaq Cybersecurity Index. As it happens, none of those companies upset my ethical sensibilities. The main disadvantages of this investment option is that its fees are relatively high, at almost 0.7%, and it is relatively higher risk.
The largest constituents at the time of writing are Accenture, Cisco, Crowdsrike and Zscaler. As it happens I own shares in Crowdstrike which sells a cybersecurity software platform well suited to monitoring distributed employees who are using their own devices. But whatever way you look at it, if the threats from cybercrime keep rising, so too will the need for cybersecurity. If you see that as a multi-decade trend, then ASX:HACK could be a good way to spice up your collection of ethical ETFs; just keep in mind it will likely be more volatile and diverge further from overall markets, compared to the broader ETFs mentioned above.
Edit: It has come to my attention that the HACK ETF also invests in two cybersecurity companies that are also involved in supplying weapons, being Thales and BAE Systems. While these only constitute about 1.3% and 2.3% of the total index respectively, their presence may understandably cause some readers to wish to avoid the HACK ETF.
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This article is not financial advice, it is general in nature, and our disclaimer is here. The author owns shares in Alphabet and Crowdstrike.