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All Contents © 2020The Kiplinger Washington Editors
By Nellie S. Huang, Senior Associate Editor
John Waggoner, Contributing Writer
| March 6, 2020
Sustainable investing, sometimes called ESG for the environmental, social and governance criteria that define the investing style, has taken the fund world by storm. But it’s not always possible to isolate the E from the S and G, and strategies vary, too. Some portfolios are defined by what they don’t own—firms that derive most revenues from fossil fuels, say. Others concentrate on innovative firms that are making the planet greener, such as renewable-energy companies.
The 10 mutual funds and exchange-traded funds highlighted below have at least a partial focus on the environment. We’ve organized them into three groups that define different approaches: Thematic ETFs that zero in on climate change exclusively; diversified funds that have a sustainable bent; and actively managed funds that hew to an ESG-oriented investment process and get high marks for environmentally friendly portfolios—whether that’s their stated aim or not. Which tack you take will depend on how passionate you are about battling climate change as well as how much risk you want to take.
Data is as of January 31. Source for returns: Morningstar Inc.
1-year return: 42.9%
3-year return: 24.3%
Expense ratio: 0.71%
If alternative energy is your thing, consider Invesco WilderHill Clean Energy ETF (symbol PBW, price $36, expense ratio 0.71%), which invests in firms that focus on green and renewable energy sources—wind, solar, hydro, geothermal and biofuel—and in technologies that facilitate cleaner energy. California-based Bloom Energy is a top-10 holding. It makes solid oxide fuel cells, which produce clean and affordable electricity by way of a chemical reaction.
The fund holds some foreign stocks, too. Nio is a Shanghai-based maker of luxury electric vehicles. Its ES6 model, a sporty SUV, can go more than 315 miles on a full charge.
WilderHill Clean Energy has a horrible 10-year record, but its 9.9% five-year annualized return is promising. Invesco’s Jason Bloom, head of global macro ETF strategy, says the returns are in part a reflection of the sector’s rough early days. “The market was right about the growth in clean energy. What it missed was how difficult it would be in the early stages to make money,” he says. But volatile results are also a sign of the risk that comes with investing in thematic funds. Year to year, the ride can be extremely rough. In 2018, the fund lost 14.1%. The next year, it gained 62.6%.
WilderHill Clean Energy spreads its bets across a range of alternative energies, as opposed to only solar or wind energy, say. That’s good from a long-term perspective. “No one knows which alternative-energy technology will win today, so don’t pick just one,” says Bloom.
1-year return: 39.3%
A more focused option from the same family is
Invesco Solar ETF (TAN, $32, 0.71%) focuses on solar power. Its top holding is SolarEdge Technologies, an Israel-based firm that makes panels that harness the sun’s energy.
1-year return: 18.9%
3-year return: 9.6%
Expense ratio: 0.60%
Another focused fund (on a different source) is First Trust Global Wind Energy (FAN, $15 , 0.60%) invests, as you might guess, in wind energy. Vestas Wind Systems, a Danish maker of wind turbines, is a top holding.
1-year return: 16.0%
3-year return: 12.8%
Expense ratio: 0.55%
VanEck Vectors Environmental Services (EVX, $106, 0.55%) isn’t as single-minded as other ETFs in this group. But dealing with a lot of trash is a recurrent theme. It holds shares in waste collection companies, recycling firms, and soil remediation and environmental consulting services.
Waste Management and Darling Industries are two of the 25 stocks in the portfolio. So are Evoqua Water Technologies, which boosts municipal water quality and industrial firms, and Clean Harbors, which provides, among other things, hazardous-waste disposal services.
The fund has only $38 million in assets—less than we’d like. But it has returned 12.6%, on average, over the past five years, in step with the 12.4% gain in Standard & Poor’s 500-stock index.
1-year return: 17.3%
3-year return: 11.4%
Expense ratio: 0.20%
IShares MSCI ACWI Low Carbon Target ETF (CRBN, $128, 0.20%) gives greater play to companies with lower carbon emissions. But the strategy is executed with the parent index in mind, in this case the MSCI All Country World index. The fund’s country and sector exposures stay within range of those of the index. The ETF and index have similar top holdings: Apple, Microsoft and Facebook. Its top country exposures are alike, too: U.S., Japan and the U.K.
But not everything is matchy-matchy. Tech, health care and industrial firms figure more prominently in Low Carbon Target than in the index. And energy stocks get less play in the ETF than in the index. All of which goes some way to explain why the fund outpaced the ACWI index over the past one, three and five years.
1-year return: 13.4%
3-year return: 7.7%
A depressed energy sector has benefited funds that avoid firms with fossil fuel reserves. The 15.1% annualized three-year return of SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX, $79, 0.20%) beats that of the S&P 500. The fund essentially holds all of the companies in the S&P 500 except those with fossil fuel or thermal coal reserves. ExxonMobil and Chevron, for instance, are out. But there are inconsistencies. For instance, Phillips 66 is among the ETF’s holdings. Perhaps it doesn’t have the kind of reserves required to merit exclusion from the fund, but it owns 13 refineries with a net capacity of 2.2 million barrels of crude oil a day.
1-year return: 22.6 %
3-year return: 15.1%
Investors seeking international exposure should consider SPDR MSCI EAFE Fossil Fuel Reserves Free ETF (EFAX, $71, 0.30%). It holds stocks in large and midsize companies, none of which own oil, gas or coal reserves that would be used for energy, in 21 developed countries. Over the past three years, the fund has returned 7.7% annualized, in line with the MSCI EAFE broad market index of foreign stocks in developed countries. Plus, it yields 3.0%.
1-year return: 14.4%
3-year return: 9.5%
Expense ratio: 1.48%
Green Century Balanced (GCBLX, 1.48%) has a very green pedigree. The fund firm, Green Century Capital Management, and subadviser Trillium Asset Management have invested sustainably for decades. And all profits from Green Century funds—two index funds and Balanced—go to a group of environmental and public health nonprofits.
A trio of managers pick the stocks and bonds for Balanced with a variety of ESG factors in mind. They are active shareholders, too, says comanager Cheryl Smith, often working with companies to improve business practices across a range of issues, from CEO pay to boardroom diversity to deforestation.
Tech companies such as Apple, Microsoft and Amazon.com are top stock holdings. The fund won’t invest in firms that make products that essentially harm or kill people, such as cigarettes or weapons, says Smith. The bond side of the portfolio, about 35% of assets, is filled with green or sustainable bonds and community-impact bonds. One holding, a Starbucks IOU, pays to train farmers in sustainable farming practices in places including Colombia, Ethiopia and Rwanda.
Investors haven’t had to sacrifice returns to do good with this fund. Over the past one-, three-, five- and 10-year periods, Green Balanced has outpaced two-thirds or more of its peers (funds that invest 50% to 70% of assets in stocks).
Expense ratio: 1.19%
Artisan Mid Cap (ARTMX, 1.19%) has an ESG focus, according to investment research firm Morningstar. But the fund doesn’t sell itself that way. It’s just managed by nitty-gritty analysts who pick good companies that happen to give the portfolio a greenish tint.
Four managers look for midsize to large firms with an innovative product or service that fits an emerging customer need. That tilts the fund toward businesses that are big on intellectual property (think medicine and software), rather than businesses that are dependent on natural resources, which helps to explain the fund’s high E marks, says comanager Matt Kamm. For example, Atlassian, a “green tech” firm and a top holding in the fund, builds a cloud-based software system that helps business teams collaborate to create apps, among other things. The fund’s 10-year annualized return, 14.8%, beats the S&P 500 by an average of 0.8 percentage point per year.
1-year return: 11.3%
3-year return: 9.1%
Expense ratio: 0.52%
Dodge & Cox Stock, (DODGX, 0.52%)a member of the Kiplinger 25, the list of our favorite no-load funds, is another mutual fund that doesn’t have to be labeled green to be environmentally friendly. Based on the good environmental qualities of the stocks it holds, the fund earns an exceptionally high E score from Morningstar, compared with its peers. The score puts the fund among the top 5% of all funds that invest in large value-priced companies, according to Morningstar.
Ten comanagers consider ESG measures in each phase of their investment research and decision-making processes. But rather than having hard-and-fast rules, they “assess ESG factors, among many others, that may be a key opportunity or risk for a company,” says Bryan Cameron, the firm’s director of research. The managers might, for example, invest in a company that has a significant ESG challenge if they believe the stock is depressed as a result of the issue and the company is taking positive steps to address it.
Value stocks have trailed the broad market in recent years. But Stock’s 10-year annualized return of 12.5% is impressive on an absolute basis, even if it lags the S&P 500 by an average of 1.5 percentage points per year.