There are few financial products that have been adopted with as much enthusiasm as exchange-traded funds (or ETFs). These low-cost investment vehicles are growing in popularity thanks to their flexibility, accessibility, and transparency.
However, the ETF market is also expanding at a breakneck pace. New options are being added on a near-daily basis, which means investors need to be even more discerning about the specific details of any given product.
For example, there are many different types of ETFs available. There are those that focus on specific niches like green investing or dividends. Some emphasize companies that exhibit certain values or social standards (e.g., ESG). Others take unique approaches to investment by focusing on industries or countries that tend not to be well-covered by other ETFs.
Read on as we explain what an ethical investment ETF is, what you should look for in an ethical ETF, and how to narrow down on high-quality ETFs.
What Is An Ethical Investment ETF?
An ethical investment ETF is a fund that focuses primarily on companies that meet certain social or environmental standards. Such funds can be a great way to integrate social impact into your investment strategy.
If you’re interested in pursuing this type of investment strategy, you first should know that ethical ETFs are not the same as socially responsible funds. The latter is a specific investment category of mutual funds (not ETFs).
For those unfamiliar with the distinctions between ETFs and mutual funds, the differences boil down to how each type of fund is managed. ETFs are basically like stocks. They allow you to buy a portion of a company by purchasing shares in the ETF. Mutual funds, on the other hand, are basically like a basket of stocks. They hold many different investments and are managed by a fund manager.
Why Ethical ETFs Are So Popular
Ethical ETFs are a great starting point if you want to pursue a socially responsible investment strategy. Investing in this way allows you to pursue social impacts while maintaining a diversified portfolio.
In addition to offering the standard benefits of ETFs, such as low cost, high liquidity, and broad investment options, ethical ETFs also allow you to pursue a positive impact in your portfolio.
Ethically, ethical ETFs allow you to invest with your values. By considering social impact when making investment decisions, you can help to create positive change while also growing your investment.
What To Look For In An Ethical ETF
While most ethical ETFs will have certain standards in common, such as a focus on green investing, companies committed to sustainability, or those aligned with certain social causes, not all are created equal.
For example, some ethical ETFs may focus on specific niches, such as clean energy, while others may cover a wide range of industries. Some funds may prioritize companies with high ratings on a sustainability index, while others may simply invest in firms taking concrete action on a given social issue.
It’s also crucial to keep an eye on the ETF’s expense ratio. This is a percentage that is deducted from your investment each year as a standard management fee. The lower the expense ratio, the more money you’ll keep.
The Bottom Line
Investing in an ethical investment ETF is a great way to integrate social impact into your investment strategy. These funds allow you to pursue positive social change and strong investment returns.
Before investing in an ethical ETF, ensure the fund has a reasonable investment focus and is managed by a reputable fund provider. You’ll also want to keep an eye on the ETF’s performance to keep pace with the market.
Once you’ve narrowed down your options, it’s important to do your due diligence. This includes reading the fund’s prospectus and considering how it compares with competing products.