Your Complete Guide to Index Investing with Dan Bortolotti

The Ethical Couch Potato

2018-06-16T10:11:11+00:00February 28th, 2010|Categories: Portfolio Management|Tags: , |24 Comments

Recently a reader wrote to me with an intriguing question: “I’m very interested in the Couch Potato strategy, but I have an added hitch: I’d also like to engage in socially responsible investing. I know there’s the iShares Jantzi Social Index Fund (XEN) for Canadian equities, but I’m not sure if there are other Canadian indexes out there, or what is available in terms of US, international, and emerging markets.”

For those who aren’t familiar with this idea, here’s a definition from the Social Investment Organization, a Canadian non-profit: “Socially responsible investment (SRI) is the inclusion of social, environmental and governance considerations into the management and selection of investments.” Companies commonly excluded from SRI indexes are those in the business of tobacco, weapons, and those with poor environmental performance, human rights violations, or poor employee relations.

Turns out that only one other index fund tracks the Jantzi Social Index, which is the most common SRI benchmark in Canada. The Meritas Jantzi Social Index Fund is one of seven socially responsible mutual funds run by a Winnipeg firm with close ties to the Mennonite community. It’s the only index fund in their lineup and it has a management expense ratio of 1.94% and a hefty front-end load or deferred sales charge.

Couch Potato investors who are looking for socially responsible investments outside Canada might consider a couple of iShares ETFs: the FTSE KLD Select Social Index Fund (KLD) and the FTSE KLD 400 Social Index Fund (DSI) both hold large-cap US companies, including Microsoft, Johnson & Johnson, IBM and Proctor & Gamble. The MER of both funds is 0.50%.

I was unable to find an ETF that tracks a socially responsible index of international equities. Neither is there a passively managed bond fund based on SRI principles.

So, for our socially responsible Couch Potato, the options are limited. The Meritas fund is way too expensive—charging 1.94% for an index fund should violate anyone’s ethical standards—so that leaves the iShares ETFs for US and Canadian equities. Actively managed but low-cost mutual funds from Phillips, Hager and North will have to do for the international equity and fixed income holdings: see the Community Values Global Equity Fund (MER 1.33%) and the Community Values Bond Fund (MER 0.65%). In fact, the PH&N Community Values Balanced Fund charges just 1.07% and covers all the bases with Canadian equities (36%), US equities (13%), international equities (13%), and bonds and cash (38%).

If you’re considering joining the ranks of socially responsible investors, make sure you dig into the holdings of SRI funds. Remember, your idea of social, ethical and environmental responsibility may not be the same as the fund manager’s. The biggest components of the Jantzi Social Index today, for example, include the Big Five banks (over 40% of the index), which are hardly the beacons of social responsibility. Another major component is Suncor, one of Canada’s biggest emitters of greenhouse gases. KLD even holds Halliburton, which has made $17 billion from the Iraq war.

As Ian McGugan has written in MoneySense, “Trying to express your ethical viewpoints through your stock holdings is a bit like trying to express your musical tastes through your choice of a hacksaw. In other words, it’s fundamentally the wrong instrument for your purposes.”


  1. Ron Robins March 1, 2010 at 11:58 am

    You make some good points concerning socially responsible investing. One thing your readers interested in this area should know is that there is nothing to stop many of them from holding an individually designed portfolio of stocks that reflects their personal values. Because stock commissions are low, most advisors (many of whom cannot sell stocks anyway) will prefer to offer mutual funds.

    I’ve been involved with the investment industry and SRI since its infancy in the late 1960s. I now advocate, teach and write on SRI/ethical investing and have a globally popular website specifically for investors interested in this area. It also covers the latest related global news and research. It’s at

    Best wishes, Ron Robins

  2. brad March 1, 2010 at 2:00 pm

    I’ve thought long and hard over the years about “socially responsible” investing, and the argument that swayed me most strongly against it is even more basic than the points brought up by Ian McGurgan in his article:

    Most of the time, when you buy shares that are already out there in the market, you’re buying them from other investors. As such, you’re not really helping the “bad” companies whose stock you’ve just bought. You haven’t actually helped them raise any new money to do more bad things that you don’t want to support.

    If that’s true, then in terms of couch-potato strategies I wonder to what extent index funds buy new offerings as opposed to buying shares that are already out in the market? I don’t know how that works, but if most of my index funds consist of shares bought from other investors then my dollars are probably not being used to directly support cigarette manufacturers or other companies I’d rather not support. Does that make sense?

    In any case, there are really two main approaches to SRI: one is “avoidance” (i.e., you don’t want to buy shares of “bad” companies), and the other is “encouragement” (i.e., you buy shares of companies that do good stuff that you want to encourage). I’m not sure how effectively you can pursue either strategy through a couch-potato portfolio.

    For my part, I’m focusing my SRI investments on the low-risk portion of my portfolio. Desjardins’ Caisse Solidaire offers a number of GICs and other secure investments whose funds are used directly to support socially and environmentally responsible projects/enterprises in Quebec and elsewhere.

    If I were rich enough, though, I think I’d pursue the Abby Rockefeller strategy and buy up tons of shares in companies that are doing things I disagree with, and then use my influence as a major shareholder to get them to change their ways. That’s probably the most powerful strategy of all, but unfortunately out of reach to all but a few of us. ;-)

  3. Mutual Fund March 1, 2010 at 3:24 pm

    Read the ethical finance guide from for impartial information on ethical investment. Mutual Fund

  4. Thomas March 1, 2010 at 11:07 pm

    Thanks for the post!

    I think the biggest problem with SRI is the lack of offerings. Although it’s true that you could never get a portfolio which matched your beliefs exactly, there are only so many belief systems, and most people fit relatively well with one or another. However, because so few investors are interested in making SR investments (or know the option exists), there isn’t the market for creating new funds. Funds therefore tend to be just called “ethical”, without a lot of nuance about what that means.

    I think if everyone insisted on buying stocks which reflected their values (and really, everyone has some kind of values), there would be a market for the funds, and people would probably end up paying not much more than they currently pay for non-ethical funds. But that will never happen.

    A note of the Jantzi social index- one thing which readers may have a problem with is that (I think) it uses a “best-in-sector” approach, which means that every sector will be represented, just by their “least unethical” corporations. This might be why Suncor is included- maybe, taking both the environment and other factors into consideration, it was the best of a bad lot.

    Brad- I think that when buying shares in companies you support increases the share price, which will help the company raise money through issuing new stock at a later time. Plus, since a common interpretation of the responsibility of the board of directors is to maximize shareholder value, the board may have a duty to increase share price whether the company benefits directly from that increase (this is partly why companies keep paying dividends year after year)

    And when you invest in a socially responsible fund, the votes which come from the shares you buy DO get used to promote “ethical” practice, so the Abby Rockefeller strategy isn’t beyond us small-time investors. This is one advantage to owning an ethical fund over particular ethical stocks. Unless you’ve got a lot of time on your hands, you’re unlikely to use your votes at all, let alone have the resources to research the various ethical issues involved in a decision.

  5. […] March 9, 2010 · Leave a Comment I am a big believer in the Couch Potato investment approach, and I highly recommend it everyone who finds money a) useful to have b) boring to think about. Now there is an ethical investment option. You can find out more about both here: The Ethical Couch Potato « Canadian Couch Potato. […]

  6. […] Couch Potato talks about The Ethical Couch Potato and whether ethical investing is a good idea or not. Ethics and making money are an interesting […]

  7. Simon March 16, 2010 at 11:28 am

    The KLD fund also owns Monsanto Corp.

    The top 10 stocks from TDB902 (tracks S&P500) are all in KLD.

    I was interested, but this ethical index doesn’t seem all that different from the S&P500.

  8. ioana March 25, 2010 at 10:28 am

    “Trying to express your ethical viewpoints through your stock holdings is a bit like trying to express your musical tastes through your choice of a hacksaw. In other words, it’s fundamentally the wrong instrument for your purposes.”

    yet… the way we express ourselves through the stock holdings carries more weight in the real world than ANY other action that we might do as environmentalists. Recycling, reusing, reducing as individuals is small potatoes compared to whether to put 10k this year into uranium or oil, versus shares of Alterna Energy, Shear Wind stock etc.

    sigh.. lots of difficult decisions to make.

  9. Stephen Moore May 14, 2010 at 5:28 am

    I work as a financial advisor and a researcher that focuses on economic development and social finance. I take issue with a lot of the traditional arguments against socially responsible investing (SRI).

    First, let me say that I am happy to see that the most common and erroneous argument against SRI wasn’t included in this post: that SRI necessarily means losing out on a degree of return. Depending on the type of SRI one partakes in, it can mean sacrificing a return, but it is not necessarily so.

    People who engage in community investment and micro-loans are often willing to lose out on a small portion of their return. At least in Canada those who incorporate community investment into their portfolios gain increased tax advantages. But accepting below market returns is not a necessity.

    There is growing research and a slowly increasing consensus amongst financial researchers that incorporating environmental, social and governance (ESG) issues into a portfolio is a necessary step because of the effectiveness of positive ESG practices to mitigate and reduce risk.

    Also, I want to come to McGugan’s erroneous and misleading analogy. Whenever a client sits down with a financial advisor, the advisor is required to fill out a Know Your Client (KYC) form. Currently, the industry only requires the KYC form to contain financial information. However, a student conducted by MacKenzie Financial, a massive mutual fund company, showed that close to three-quarters of investors wanted their advisors to ask them about their values. To argue that someone should not incorporate their ethics and values into their investment portfolio when they incorporate those same beliefs into their other daily decisions creates an existential gap. It is also another manifestation of market fundamentalism: whatever the market decides is what is ethical.

    Finally, I understand that many SRI funds and ETFs incorporate less than ethical companies into their portfolios. The difference between SRI funds and traditional mutual funds is that SRI fund companies take a progressive and proactive role when it comes to their voting records. They believe that shareholder activism is a positive way to engage with companies and that it will be easier to change behavior from the inside rather than completely boycotting a particular company.

    SRI is about matching beliefs with portfolios, creating progressive change in corporate governance, mitigating risk over the long-run and still earning returns that will allow someone to retire. The only way to argue against incorporating someone’s ethical beliefs into their portfolio decisions is through a misleading and false analogy.

    I am happy to see increased attention and debate on this topic amongst personal finance bloggers.



  10. Christy January 9, 2012 at 9:47 pm

    is there an update on this post somewhere, as in, what might be available now for SRI couch potato strategies?

  11. Canadian Couch Potato January 10, 2012 at 1:11 am

    @Christy: Sorry, as far as I am aware, there are no new options for Couch Potato investors who want to follow SRI.

  12. J A H November 8, 2012 at 11:54 am

    I dropped by because the Globe and Mail published an article today about the potential to do more poorly than the market.

    Throughout I found defenders of SRI seem unconcerned with the huge costs and fees associated with packaged funds, and the risks of stock picking for individually managed portfolios.

    Right now it doesn’t appear investors with social conscience are being served based on couch potato values. It’s unfortunate that investors have to be talking at cross purposes in areas in which they probably have a lot in common.

    Dan, please keep this on your radar because there are probably more than a few of us who would be interested in knowing if and when appropriate investment products come to market.

  13. Canadian Couch Potato November 8, 2012 at 12:47 pm

    @J A H: The problem with SRI and index investing is they are largely incompatible. How can you design an index without making all kinds of assumptions about what makes a company socially responsible? As the Globe article points out, some people might consider Monsanto to be problematic because it makes seeds for GMOs, while other investors may not see any ethical problem with that. Some SRI-inclined investors may have no issue investing in alcohol or gambling companies, while other find these repugnant. It seems to me that socially responsible investors would have to fund an index they can embrace fully, or they’ll have to pick their own stocks.

  14. Trevor January 15, 2013 at 10:11 pm

    I’ve given this a fair bit of thought and I think I’ve found a solution. Like many people, I’ve always been a little dubious about ethical funds simply because they seem to simply frequently invest in banks a lot of the time. How is that really ethical as banks will simply use your money to invest in things that I’m sure the ethical investor would find distasteful. So what is an ethical couch potato to do?

    My solution is simple: when I rebalance (I’m in the beginning stages of being a couch potato) I’m going to calculate the MER difference between my couch potato fund and an ‘ethical’ fund. This is likely to be at least one percent. I then multiply the value of all my investments by this amount and give this amount to a charitable organisation that forwards a cause I believe in. I really do think that this likely has more ‘ethical value’ than marketed ethical funds because your money is going to a cause you believe in rather than a financial advisor that simply bundles a one degree of evil removed mutual fund.

    All in all I feel really happy with this approach – like the couch potato method at its source – it’s simple, straight forward, pragmatic and a this approach incorporates a fairly substantial cost into your long term financial plan.

    Of course, what I want to do with the nice tax refund I get is also a nice perk.

    This would make a great article for Moneysense ;)

  15. Trevor January 16, 2013 at 12:37 am

    Yeesh, I just looked at some ethical funds and they have MERs more in the 2.35 range. Yikes! Compared to the complete couch potato with a MER of 0.29. Looks like 2% donation is in order.

  16. Timothy Nash February 16, 2013 at 6:07 pm

    Hi Everyone,

    I’m a fee-only financial planner that specializes in socially responsible / green investing. I’ve created the Organic Couch Potato Portfolio using socially responsible ETFs. Check it out:


  17. Jonathan April 14, 2014 at 2:38 pm

    To counter the excellent objection voiced by Brad, maybe we should be looking for “Ethical Venture Capital” rather than “Ethical investing”

    Bridges Ventures is a private British company in the field, see this article in the Independent:

    Didn’t see anywhere on the Bridges Ventures website where they might be seeking outside investment, however.

  18. Timothy Nash April 14, 2014 at 2:50 pm

    Oops, I changed domain hosts and it looks like the dashes are now underscores in the domain:

  19. Adam June 16, 2015 at 11:32 am

    The solar shares look very interesting – guaranteed 5% return per year for the entire 5 year term? Would this be an alternative to bonds, or would we lose some diversification? I know that bonds and stocks are negatively correlated, so I guess if stocks fell you wouldn’t get the benefit of bonds increasing.. but 5% guaranteed for what many would consider an “ethical” investment sounds very very good, am I missing something?

  20. Adam June 16, 2015 at 11:33 am

    Forgot to add the link (this is just from Timothy’s model portfolio):

  21. Canadian Couch Potato June 16, 2015 at 12:31 pm

    @Adam: I haven’t looked closely at these bonds, so I can;t comment on them specifically, but in general I would want to know who is “guaranteeing” the return. (Any bond has some risk of default.) Also, there is likely no secondary market for bonds like this, which is a problem if you need liquidity. Remember, if a bond is paying significantly more tha others of the same maturity, there is always a trade-off.

  22. Mike January 17, 2017 at 7:18 pm

    Hi Dan,

    I was looking into “ethical” investments and happened upon this post? Have there been more, and perhaps better, offerings since this was posted in 2010?

    Many thanks for any insight you can provide.

  23. Canadian Couch Potato January 17, 2017 at 8:12 pm

    @Mike: I think there are actually fewer options now. This site should be helpful:

  24. Holly Vipond February 20, 2017 at 7:09 pm

    There may not be a lot of SRI options still for “couch potato” strategies, and I agree with the above comment that it may be because the two may be incompatible (or at least to a degree). This is becoming more of a discussion across Canada and there are now a lot more options for *managed* funds; the biggest in Canada is NEI Investments, which offers a wide array of funds, and I love how they think and how they make their investing decisions (no I do not work for them, but I do use their funds!). You can also find a local advisor who specializes in Socially Responsible Investing on the RIA Canada site–I’m one of those advisors, and my profile is here:

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