There are a number of Exchange Traded Funds (ETFs) that invest only in “ethical” public companies. Many of these ethical ETFs focus on different asset classes, and hence it is now often possible to construct a diversified portfolio comprising of different ethical ETFs across various asset classes. Ethical investing is also referred to as 'Socially Responsible Investing' or 'Sustainable Investing' or 'Environmental, Social and Governance (ESG) investing'.
The advantages of investing in ethical ETFs are:
- you get to benefit from investing in ETFs, a financial instrument whose structure is preferred, while making sure that your investments are ethical.
- a sense of happiness you enjoy when your investments are in line with your ethical values.
The disadvantages of investing in ethical ETFs are:
- the expense ratio of an ethical ETF is relatively higher, compared to that of regular ETFs, as of now.
- the returns can be lower, because certain high-performing public companies are not included for ethical reasons.
Please note that you should be aware that ethics are subjective. The action of one public company may seem to be ethical to an investor, while being unethical to another investor. You should read carefully the eligibility criteria and the ethical benchmarks that are followed by each of these ethical ETFs for inclusion of a public company into their fund, and make sure that the eligibility criteria conform to your own ethical values. Sometimes, ethical investment might not be the most optimum investment approach for you, when viewed from pure commercial perspective.
The number and size of ethical ETFs are increasing. This is a good development because any public company will be better incentivised to act ethically, in addition to focusing on its top-line and bottom-line.