What You Need to Know About Fees and Your ESG Investments
Let's talk about the elephant in the room.
Fees and your ESG investments.
This article will talk about:
The Black, White and Grey of fees
Here's the punchline...
If you're pursuing an Ethical, Sustainable or ESG investment,
you'd better get used to some grey...
Black, White and Grey
Expenses are pretty black and white. It is easy to understand that a fund with 0.10% in expenses costs twice as much as a fund with 0.05%.
The late John Bogel has taught us that expenses are important.
But some investors can be a bit fanatical about expenses.
First, let's look at some numbers.
Some Black and White.
According to assets under management, these are the largest investment funds: 1
(Ticker, Expense Ratio & Assets)
Traditional Mutual Funds
ESG Mutual Funds
Disclaimer: Data is believed to be reliable. The expense ratio and assets are as of 9/9/2020, data from Charles Schwab.
Looking at this info, you may notice two things:
Yes, ESG investments are generally more expensive.
They also have a lot less in assets.
Now let's look at the Grey
The largest traditional mutual funds are index funds
The largest ESG mutual funds are actively managed
This is not an apples to apples comparison.
The ESG ETF's have much lower expenses and would be a better comparison.
However, they have significantly less assets than any of the largest traditional mutual funds.
Typically mutual funds and ETF's tend to lower their expenses as assets grow.
Let's look at a real life comparison
We'll use an ESG ETF with one of the longest track records.
The closest comparison is one of the largest S&P 500 index ETF's.
Data is from Morningstar
Over this 14 year time period, the S&P 500 ETF (RED) did outperform the ESG investment (GREEN) by 0.20%.
When you factor that the expense difference between the two is 0.22%, (0.25% for the ESG ETF & 0.03% for the S&P 500 ETF), I would not call this an investment underperformance,
I would attribute this performance disparity to the difference in expense ratio's.
That being said, with black and white factors, the higher expenses of the ESG fund were a factor in performance.
Now for the Grey
Let's say you've committed to owning one of these funds for the last 14 years.
Would you be willing to give up 0.20% in return to own a fund that was in the top 7% of of it's category for sustainability score vs. 47%?
Or a noticably lower carbon footprint?
Interestingly, I did a fund comparison of the 10 largest traditional and ESG mutual funds and the results were a bit surprising.
The fund with the highest return over the longest common time period was the fund with the highest expenses!
Note: the above comparison is not meant to be an apples to apples comparison. A bond fund and a stock fund are not in the same category. I merely wanted to see how these investments stacked up against each other to see the impact of fees.
Let's put this into another perspective
Are you willing to pay more for organic eggs, meat or other products because you believe they are healthier for you & the environment?
Would you prefer to shop at your local family owned store vs. the big box store?
How you answer all of these questions will be factors in determining if using ESG investments is right for you.
Personally I believe that ESG investments could offer potential performance gains that could offset any increase in costs. Check out this article.
I'm a believer that the positive social impact of ESG investments is worth a slightly higher expense ratio.
While fees & expenses are an important factor for investment performance, they are not the only factor.
As ESG investment assets continue to grow, expenses will likely decrease with time.
I believe this world would be much better off if we choose to use more environmentally sustainable investments rather than "offsetting" any potential harm by donating to charity.
What this all means for you:
Investing with your values is a journey, not a math exercise.
If you don't know where to get started, I would encourage you to check out our Ultimate Guide to ESG Investments.
If you prefer to delegate, feel free to schedule a phone call. We're happy to help...
We're a different kind of financial firm than you may be used to.
1) Charles Schwab