Socially responsible mutual funds are on the rise as a consumer market grows increasingly interested in ethical consumption. Investors also want to reward corporations that responsibly manufacture their products and treat employees well.
Socially responsible mutual funds invest in companies that follow predetermined ethical standards. Fund managers carefully examine one or more aspects of how a corporation runs its business or creates its product and hand-select stocks and investments that adhere to the values and beliefs of the fund.
What is considered ethical can vary wildly by culture, region or religion, so fund managers often value a sense of complete transparency when it comes to attracting investors.
Quick Look: The Best Socially Responsible Mutual Funds
- iShares MSCI KLD 400 Social ETF (DSI)
- SDRP S&P 500 Fossil Fuel Reserve (SPYX)
- Vanguard FTSE Social Index (VFTSX)
- SPDR SSGA Gender Diversity Index (SHE)
- Eventide Gilead Fund (ETGLX)
- TIAA-CREF Social Choice Bond Fund (TSBIX)
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What’s a Socially Responsible Mutual Fund?
Every mutual fund has its own idea of what makes a company socially responsible. Mutual funds may place an emphasis on one or more factors when managers choose stocks to include in the fund.
How an employer treats his or her employees says a lot about the company’s values. The most socially responsible companies offer their employees a host of benefits, ranging from generous paid maternity and paternity leave, comprehensive medical and dental insurance plans and opportunities for employees to advance in the company.
Under law, corporations are not allowed to discriminate in their hiring based upon race, gender, sexuality, nation of origin or other protected classes. However, some companies go above and beyond to empower their female employees and employees from disadvantaged backgrounds through continuing education programs and increased diversity quotas.
Though most corporations do some sort of giving back with their profits, some companies go above and beyond, pledging a certain percentage of earnings to local and national community causes.
The most socially responsible corporations also own up to their contributions to global warming and pollution.
Corporations may put a cap on the amount of emissions they put into the environment, retool their products to contain less waste or to be more biodegradable or offer annual or semi-annual transparency reports that educate shareholders on what the company does to offset its impact.
Socially responsible companies may create their products in an ethical way (by paying their employees a living wage and avoiding “sweatshop” labor) or they may refuse to enter, support or partner with certain markets that are known to cause harm (for example, the manufacture of cigarettes, alcohol or UV tanning beds).
Adhere to Religious Values
While not inherently socially responsible, some corporations align themselves with the teachings and doctrines of a certain religion. Do your research if you want to support a business whose religious beliefs align with your own.
As you choose which mutual funds to invest in, you’ll need to decide which factors fit your beliefs best. Let’s take a look at some of our favorite socially responsible mutual funds currently available for new investors.
1. iShares MSCI KLD 400 Social ETF
This mutual fund rewards information and technology corporations who promote “positive environmental, social and governance changes.” The iShares MSCI KLD 400 Social ETF places its holdings mostly in large-cap tech companies like Microsoft Corporation, Facebook and Alphabet (parent company of Google).
Want to invest in big tech with a lower expense ratio (0.25%) but wary about news stories of human rights violations? This may be the right mutual fund for you.
2. SDRP S&P 500 Fossil Fuel Reserve
SDRP’s Fossil Fuel Reserve launched December 2015. Its goal is ambitious — to replicate the performance of the S&P 500 while excluding companies that hold reserves of fossil fuels. It maintains holdings in over 400 corporations and has an expense ratio of 0.25%.
Perfect for investors who want to encourage and promote the development of alternative energy sources, the SDRP S&P 500 Fossil Fuel Reserve offers a replacement for investors seeking the safety of a reliable index fund while also maintaining higher environmental standards. If you’re interested in learning more about fossil fuels and the need to invest in cleaner energy sources, check out this primer from BBC:
3. Vanguard FTSE Social Index
Founded in 2000, the Vanguard FTSE Social Index is an offering from longtime financial institution Vanguard that focuses on large- and mid-cap offerings that meet certain employee and environmental standards.
It has an expense ratio of 0.18%, making it a perfect option for the novice investor who wants to do good but also make money as well. The fund’s largest holdings are in Microsoft, Apple and Alphabet and total investments in the mutual fund are equal to about $5.6 billion.
4. SPDR SSGA Gender Diversity Index
The SPDR SSGA Gender Diversity Index seeks to empower and invest in female entrepreneurs and companies that place female employees in the highest positions of power.
The mutual fund ranks corporations in the fund by 3 different standards of gender diversity and employee rights that help close the gap between men and women in the workplace. (For example, the average difference in pay between male and female employees and breadth of paid maternity/paternity leave.) The fund is diverse, with 165 holdings and over $278 million in managed assets.
Some of the fund’s largest holdings are in Johnson & Johnson, Mastercard Inc. and The Home Depot Inc., all of which have women on their boards. The SPDR SSGA Gender Diversity Index is perfect for investors who want to place their money into large-cap stocks and support a more diverse, female-friendly workforce.
5. Eventide Gilead Fund
The Eventide Gilead Fund is a religiously-grounded fund whose mission statement is “to honor God and serve its clients by investing in companies that create compelling value for the global common good.”
Managers invest selectively in mid-size corporations that shareholders believe adhere to the firm’s Protestant values. The fund’s holdings are massive, with $2.13 billion in assets currently under management; the fund’s largest holdings are in Ascendis Pharma A/S, Twilio Inc., The Trade Desk and Wayfair Inc. Class A. No one investment makes up over 5% of the fund’s total composition, so assets are diverse.
However, these morals come at a price. Depending on which class fund you choose, total expenses could be up to 2.21% (Class C), which is significantly higher than others included on this list.
6. TIAA-CREF Social Choice Bond Fund
The TIAA-CREF Social Choice Bond Fund has an advisor expense ratio of 0.53% (considered low for an actively managed fund) and holds most of its assets in U.S. Treasury notes, bonds and bills. The fund is unique because, unlike other options on this list, the majority of its holdings are bonds, including fixed-income securities of all types.
The fund pays special attention to invest in “securities that demonstrate environmental, social and governance (ESG) leadership and/or direct and measurable environmental and social impact,” which fund managers believe is a strategy that results in higher sustainability.
Environmental and societal impact is measured by a number of factors, including the bond issuer’s commitment to providing affordable housing, annual investments in sustainable energy and development of resources available to low-income and historically underserved communities and populations.
Choose the Right Socially Responsible Mutual Fund
As public concern for and awareness of social injustices and the environmental impact of corporations reaches an all-time high, investing in companies that do more to care for employees and their families, control pollution and serve their communities can be a sustainable and profitable investment strategy. For example, as new government restrictions are placed on coal mining, investing in companies working to develop clean energy reflects bright long-term financial prospects.
However, investors need to treat these socially responsible funds with the same level of scrutiny when investing in any other stock, bond or mutual fund. Don’t assume that just because a mutual fund bills itself as “socially responsible” that it will adhere to your specific values. Before you invest, research the fund’s criteria for asset selection. Some fund managers are much more strict when it comes to inclusion than others. Finally, don’t abandon what you’ve learned about investing just because a fund aligns with what you believe is right.
A poorly-managed mutual fund does little to help the communities it seeks to serve and even less for your long-term financial goals.