Your Complete Guide to Index Investing with Dan Bortolotti

Podcast 8: Couch Potato With a Conscience

2018-05-29T21:09:21+00:00May 18th, 2017|Categories: Podcast|Tags: |34 Comments

Are you interested in indexing but uneasy about the idea of investing in certain “sin stocks”? In my latest podcast, I look at whether you can be a Couch Potato investor and still stay true to your values.

The episode features a detailed interview with Tim Nash, a financial planner, creator of the Sustainable Economist blog and a specialist in socially responsible investing (SRI), with a particular expertise in green ETFs. I first interviewed Tim here on the blog back in 2013, and since then he has been my go-to guy on sustainable investing.

During the interview we discuss several ETFs. Here are links to the ones Tim mentions:

iShares Jantzi Social Index ETF (XEN) offers exposure to 50 large-cap Canadian companies weighted according to environmental, social, and governance (ESG) criteria.

iShares MSCI KLD 400 Social ETF (DSI) is one option for large-cap US stocks. According to Tim: “Really what they’re trying to do is to replicate the S&P 500, but getting rid of the worst of the worst companies.” The fund drops the lowest-ranking 20% of stocks based on their ESG scores.

iShares MSCI USA ESG Select ETF (KLD) takes a different approach: rather than using what Tim calls a “do less evil,” strategy, KLD’s approach is about “doing more good.” The fund holds 100 large- and mid-cap stocks selected for their positive ESG characteristics.

Until recently it was difficult to find good options for international equities with an SRI focus, but Tim mentioned two new ETFs worth considering:

iShares MSCI EAFE ESG Optimized ETF (ESGD) is based on the best-known index for developed countries outside North America, including Japan, Australia and much of western Europe. “Companies with a higher sustainability score have a higher weighting in the portfolio,” Tim explains. “There are still some companies in here that I don’t like very much, but they’re weighted much lower relative to the traditional benchmark. It’s a step in the right direction.”

iShares MSCI EM ESG Optimized ETF (ESGE) uses a similar strategy for emerging markets, including China, Korea, Taiwan and India.

Finally, Tim discussed the PowerShares Cleantech Portfolio (PZD), a US-listed fund that holds a global mix of companies in the green technology sector.

Two robo-advisors currently offer socially responsible options in their ETF portfolios: Wealthsimple and ModernAdvisor. You can read Tim’s review of Wealthsimple’s strategy here.

If you’re interested in SRI, Tim offers independent financial planning tailored to individuals and their values. You can contact him via his website or just follow him on Twitter at @timenash.

Ted’s Bogus Journey

In the “Bad Investment Advice” segment, I take some cheap shots at Ted Seides, the poor sap who in 2007 bet Warren Buffett $1 million that he could pick five hedge funds that would outperform an S&P 500 index fund over the next decade. That 10-year period ends this December and Mr. Seides has already conceded defeat.  As of the end of 2016, the S&P 500 had delivered an annualized return of 7.1% over nine years. Meanwhile, according to Fortune magazine, “the average for the five hedge funds (whose names have never been made public) is 2.2%.” All five hedge funds lagged by a wide margin: the best grew at 5.6% annually, while the worst delivered an embarrassing 0.3%, less than what you would have got from a Tangerine chequing account.

Earlier this May, Seides published an article in Bloomberg in which he presented a list of excuses for losing his million-dollar wager. I am not above kicking a hedge fund manager when he’s down, but my real goal here was to highlight the bogus reasoning used by other active managers to explain away their own underperformance.

One of my favourites was Seides’s remark that after the crash of 2008–09, “hedge-fund investors stood a much better chance of staying the course and earning the returns on the rebound, even if those returns were less than those of the index fund.” Really? It’s hard to imagine that the investment committee of any pension fund or endowment would have confidently stuck with any hedge fund that underperformed that badly over even two or three years, let alone 10.

As for index investors, this study suggests that during the 2008–09 crisis and the 2011 bear market, Vanguard investors tended to show discipline after all: “For the most part, investors fared reasonably well by choosing low-cost investments and staying the course, even in the midst of a turbulent investment period.”

Coming soon

This episode’s Ask the Spud segment address a question from a reader about whether it makes sense to liquidate your taxable portfolio all at once if you’ve decided to move from stocks and mutual funds to ETFs. I’ll address this question in detail in a future blog post.