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All Contents © 2017The Kiplinger Washington Editors
If making money and doing good are two of your top objectives as an investor, you aren’t short of options. Nearly 115 U.S. stock mutual funds and exchange-traded funds have formal directives to invest in line with certain environmental, social and corporate governance values. Some 20 so-called ESG funds have launched since the start of 2016.
These funds invest only in companies that earn high marks on green, social and workplace issues, including how mindful the firm is of its environmental impact, whether it treats employees, customers and suppliers well, and whether it follows policies that align the interests of management and shareholders. Such funds typically avoid firms involved in tobacco, weapons or alcohol, among other things. Believers are convinced that businesses that excel on ESG measures will endure over the long haul and be more successful than companies that fall short.
What investors might not realize is that they don’t have to invest through a firm that specializes in ESG funds to have a socially responsible portfolio. Another strategy is to buy shares in a fund that might not have a formal screening process but nevertheless happens to hold many shares in socially conscious firms. The following three Vanguard mutual funds and three ETFs win high sustainability marks and are worthy investments, too. Only one of the six has an official ESG mandate.
By Nellie S. Huang, Senior Associate Editor
| April 2017
We used new sustainability ratings from Morningstar, the investment research firm, to home in on the best Vanguard funds that blend a desire to do good with exceptional investment results. Morningstar analyzes the portfolios of thousands of mutual funds and exchange-traded funds. Depending on how many companies in the fund score well on ESG measures, the firm rates the overall portfolio “high,” “above average,” “average,” “below average,” or “low” for sustainability. Morningstar relies on individual-company ESG ratings from Sustainalytics, one of the many firms that offers this service, to assess fund portfolios. All fund returns are as of March 21.
Expense ratio: 0.26%
One-year return: 15.6%
Three-year return: 10.1%
Five-year return: 12.9%
10-year return: 7.7%
Fund sustainability rating: High
Equity-Income is a member of the Kiplinger 25, the list of our favorite no-load funds. The fund ranks above 95% of similar funds—those investing in large-company stocks trading at a discount—for ESG investing, according to Morningstar’s sustainability ranking. Equity-Income has delivered on the performance front, too: Since mid-2007, when the current management arrangement began, Equity-Income has outpaced the S&P 500, with less volatility.
The fund’s overall objective is to invest in midsize and large-company stocks that pay above-average dividend yields. The fund achieves that goal in two different ways because the fund’s assets are divided between two subadvisers.
Wellington Management’s Michael Reckmeyer, who controls two-thirds of the fund’s assets, picks 60 to 70 firms that can raise their payouts over time. He likes firms with strong balance sheets trading at a discount.
Vanguard’s in-house stock-picking team uses computer models to find stocks that have four key characteristics: consistent earnings growth, healthy income statements and balance sheets, smart management, and positive market sentiment. The team then whittles the list to 100 stocks after considering share prices in relation to earnings, sales and other measures of value.
Expense ratio: 0.22%
One-year return: 18.3%
Three-year return: 10.0%
Five-year return: 14.4%
10-year return: 6.4%
Fund sustainability rating: Above average
To pass muster for inclusion in the index underlying this sustainable-investing fund, companies are measured against 300 ESG indicators. Environmental screens look at water use and pollution. Social screens cover labor standards, health and safety records, and community impact, among other things. Governance criteria run from corporate risk management to anti-corruption standards. Firms involved in coal, tobacco, weapons systems, components for controversial weapons (chemical weapons or landmines, say), are automatically excluded.
The result is a portfolio that currently consists of 444 mostly large-company stocks. The fund’s top holdings include Apple, Microsoft and Johnson & Johnson. Over the past five years, Vanguard FTSE Social Index has returned 14.4% annualized, which beats the S&P 500 and 98% of funds that hold stocks in large companies with growth and value characteristics.
Expense ratio: 0.36%
One-year return: 10.4%
Five-year return: 17.6%
10-year return: 10.9%
Manager Jean Hynes is a veteran. She has scrutinized health care companies for the past 20 years, since she started as an analyst at Wellington Management for the Health Care fund. In 2008, she was named the fund’s comanager. And in 2013, she took over as the fund’s only manager after her mentor and comanager, Ed Owens, resigned. Since then, Hynes has hit a home run, with a 18.8% annualized return that beats the S&P 500, the fund’s global health care benchmark, and the typical health care stock fund. Hynes seeks to capitalize on new innovations in drug research and development, with a focus on established drugmakers that have swiftly adapted to new technologies, or on new companies that are, says Hynes, “ahead of the curve in terms of innovation.”
Although the fund owns companies across the health care sector, including insurers and equipment makers, a pharmaceutical-heavy portfolio—about 60% of Health Care’s assets are invested in pharmaceutical and biotech firms—held the fund back over the past year as those stocks came under fire during the recent U.S. presidential campaign. The pressure lingers amid outrage at the high cost of drugs and concerns that Congress might force manufacturers to roll back their prices. As a result, the fund’s one-year return lags behind 74% of other health care stock funds and ETFs.
But the long-term prospects for the fund are promising, and the mix of companies in Hynes’s portfolio should help it stand out against the competition. Vanguard Health Care ranks among the top 8% of funds and ETFs that focus on health care stocks for the sustainability profile of its holdings.
Vanguard Health Care ETF (VHT) is worth considering, too. It’s a less expensive option, at 0.10% in annual expenses, than the actively managed Health Care Fund. The fund ranks respectably on sustainability, among the top 23% of health care funds and ETFs. Over the past year, the ETF ranked in the middle of the health care fund pack, with a 14.3% return.
Expense ratio: 0.10%
One-year return: 25.3%
Three-year return: 14.7%
Five-year return: 14.0.%
10-year return: 10.6%
Information Technology is a member of the Kiplinger ETF 20, the list of our favorite ETFs. And it should come as little surprise that a technology-focused fund makes a roster of socially conscious funds. After all, when you think about some of the fund’s top holdings—Apple, Alphabet and Facebook—images of employee-friendly workspaces (generous salaries and benefits, nap pods in the office) and environmentally aware business practices abound. The fund’s sustainability rating ranks it in the top 22% of tech funds.
Information Technology currently holds 360 mostly large companies (nearly 80% of assets), plus a smattering of small and midsize technology firms. The firms are weighted by market value, which means the bigger companies take up more of the fund’s assets. The top 10 holdings make up 55% of assets. The fund’s annualized returns over the past three, five and 10 years outpaced at least 21% of similar funds.
Expense ratio: 0.15%
One-year return: 15.4%
Three-year return: 10.9%
Five-year return: 13.5%
10-year return: --
The fund holds the fastest-growing stocks in the S&P 500 index, measured by past 12-month price performance and past three-year change in earnings and sales per share. Apple, Alphabet and Microsoft are among its top holdings.
Vanguard S&P 500 Growth ETF has outpaced the S&P 500 index in four of the past six full calendar years (the exceptions were 2012 and 2016). Over the past five years, the ETF’s 13.5% annualized return just edges past the S&P 500, but it blows past the average fund that invests in large, growing companies. The ETF ranks in the top 8% of funds for the environmental, social and governance qualities of its holdings, relative to other funds that invest in large, growing companies.
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