Q: I understand the wisdom of index funds. However, I’m trying to divest of oil and gas/fossil fuels and most index funds hold them in the top 10 holdings. What would you recommend? Jean
A: It’s getting somewhat easier for individuals to divest or reduce their exposure to investments in fossil fuels. So-called socially responsible investing, also known as value-based, sustainable and impact investing, reflects the desire among many investors to break down traditional barriers between their charitable giving and their portfolio choices.
“Most people aren’t saying I want fossil fuel out because I will get a higher return or a lower risk,” says David J. Bromelkamp, president and CEO of Allodium Investment Consultants in Minneapolis. “Most people looking at fossil-free investing really care about the environment.”
You can research various options at a number of investment portals online, such as the database Morningstar (www.morningstar.com) and the Social Investment Forum (www.socialinvest.org). You will pay a higher fee than on the classic S&P 500 equity index fund in a socially responsible index fund that is fossil free or a reduced presence to the traditional energy sector. I would remain a fee hawk, looking for the broadest-based index fund possible with low fees that still meets your value goals.
Here are a couple of suggestions to begin your research. State Street Global Advisors offers the S&P 500 Fossil Fuel Free ETF. An ETF, or exchange-traded fund, means the index is bought and sold just like a stock. This ETF is designed to mimic the S&P 500 minus companies that own fossil fuel reserves, defined as economically and technically recoverable sources of crude oil, natural gas and thermal coal. The ETF has a gross expense ratio of 0.25 percent. (To put that figure in context, Vanguard’s classic S&P 500 equity index has an expense ratio of 0.01 percent.) ETHO Climate Leadership U.S. is another ETF to investigate. The fossil-free ETF aims for an overall carbon emissions profile up to 70 percent lower per dollar invested than a conventional broad-based benchmark. The expense ratio is 0.45 percent.
Also consider funds that still have some exposure to traditional energy. The Vanguard FTSE Vanguard Social Index mutual fund screens investments for certain social, human rights, and environmental records. It has an expense ratio of 0.15 percent. The TIAA-CREF Social Choice Equity fund has an expense ratio is 0.18 percent.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.