A NEW FIRM called Life + Liberty Indexes has created what it calls the Freedom 100 index of emerging markets stocks. Unlike other indexes, which typically weight stocks by their market value, the Freedom 100 weights countries by measures of freedom. These include freedom of religion, freedom of the press and freedom of assembly, among others. In short, the Freedom 100 looks like it could have been created by the authors of our Declaration of Independence.
Result? The Freedom 100 looks very different from other indexes of emerging markets stocks. For example, the FTSE Emerging Markets index, on which Vanguard Group bases its emerging markets fund, allocates more than a third of its assets—the largest weighting by far—to China. It also includes allocations to Russia, Saudi Arabia and other places where “life, liberty and the pursuit of happiness” isn’t exactly the government’s motto. Meanwhile, the Freedom 100 excludes all of those countries.
Life + Liberty just launched, but it raises a broader question: Should you align your investments with your values? With the growth of index funds—which seek to own all the stocks in a particular market—this is a question worth considering. While I’m a big believer in index funds, I recognize there’s an unavoidable downside: When you own an index fund, you unwittingly become a shareholder in many companies you might not otherwise want to own. The S&P 500 index, for example, includes companies that make cigarettes, alcohol and weapons.
The good news is, there’s a growing number of ways to solve this problem. In addition to the Freedom 100, lots of other “socially responsible” indexes exist, and lots of funds have been built around these indexes. BlackRock offers nine such funds, covering domestic and international markets. Vanguard offers several as well. If you wanted to build your entire portfolio around these funds, you could. But before you do, consider two key questions:
How do you define “socially responsible”? Some years back, I worked for a firm that had a policy against buying stocks in alcohol, tobacco and gambling-related companies. It was, I thought, a good policy and successfully screened out most so-called “sin” stocks.
But there’s no universal definition of “socially responsible.” You could just as easily make it a policy to exclude manufacturers of assault rifles, pesticides and opioids. Or you could judge companies based on their environmental track record, their approach to charitable giving or their respect for workers’ rights.
Everyone has their own criteria. In my own case, it drives me crazy that, via index funds, I am a shareholder in a company called Navient, which is a big player in student loans—with a reputation for being not so friendly. To complicate matters further, many companies score well on some social responsibility criteria, but poorly on others. Want to tilt your portfolio to align with your values? The first question is how you want to translate your values into an investment policy.
Is investment performance a concern? For years, many have wondered whether it helps or hurts performance to invest with a socially responsible filter. It hasn’t been an easy question to answer. As noted above, there’s no single definition of socially responsible. Many of these strategies are new, so there isn’t enough data to make reliable judgments.
That said, the data does indicate that, on balance, you won’t sacrifice investment performance—and you might even benefit—if you went with a socially responsible portfolio. But there are no guarantees. Indeed, the only certainty is that your results will vary from the overall market. For that reason alone, if you try socially responsible investing, you might try it with just a portion of your investment dollars.
Still want to better align your portfolio with your values? Consider three options:
1. Funds. Today, there are more than 350 funds in the “socially responsible” category. That’s both a blessing and a curse. Because everyone defines the term differently, it’ll require a good amount of research to find one that matches your own personal philosophy. But there’s probably one out there that will be a reasonably good fit.
2. Custom portfolio. If there isn’t a fund that meets your needs, another approach would be to build your own portfolio from scratch. This would allow you to effectively build your own personal index fund tailored to your values. My only caution: If you go this route, be careful of costs. Because of brokerage commissions and other trading costs, this would make sense only for large portfolios.
3. Offset your sin stock profits with charitable giving. If you aren’t interested in building your own socially responsible portfolio or choosing one off the shelf, there’s another approach you might consider: Stick with standard index funds, but then make it an intentional part of your process to contribute to charities that reflect your values. That way, you would take profits from companies that you consider socially irresponsible—and use those dollars to support causes that are to your liking.
Adam M. Grossman’s previous articles include Say No to Mo, Playing Nice and Stepping Out. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.