ETFs make up only a fraction of the global financial market. However, their trade has gradually increased over the years, with the highest record being over $53 trillion in 2022. An ETF is an exchange-traded fund whose aim is to aid in ethical investment. For instance, it can invest in socially responsible or eco-friendly companies.
What are Ethical ETFs?
An ethical ETF aims to exclude certain companies or industries from being part of their investment holding. Instead, it targets companies or industries that meet specific sustainability criteria. An ethical ETF benefits investors by enabling them to invest in companies that align with their values and morals. In addition, an ethical ETF positively impacts environmental and social change by rewarding companies that help them grow.
Ethical ETFs’ goal is to invest with a conscience. Meaning all ‘sin’ industries like pornography, weapons, tobacco, or gambling companies are excluded from the fund. The fund gives much weight to top-performing companies using criteria like gender diversity, carbon footprint, or social impact. However, some ETFs focus on one criterion, like clean energy.
How an Ethical ETF works
Ethical ETFs match companies to key ethical indices to create a sustainable fund. The indices are compiled using environmental, social, or governance criteria. The fund may use the same percentage to buy into each stock within the index or use full physical replication to replicate index performance. On the other hand, they may use sampling to buy companies to deliver the index performance or synthetic replication where they use derivatives.
How to Choose the Ethical ETF to Invest In
Ethical ETFs also trade on exchanges like normal stocks. This means you can use a broker or platform to purchase them. Buying ethical ETFs requires more subtlety than standard ETFs. Investors need to decide which ethical parameters and options have a higher chance of stellar financial performance.
So, choosing an ethical ETF requires checking the index’s construction and whether its ethical goals align with yours. For instance, are gender diversity or environmental factors more important to you? Do you want to invest in certain companies only? Or are there specific sectors you are targeting?
Also, consider a single theme ETF if there is a particular cause you want to support. Single theme ETFs have a narrow focus. For instance, if you want to focus on women in leadership, find an ETF that prioritizes companies with female CEOs. However, investing in such ETFs can make you miss out on better opportunities.
A general ethical ETF prevents accidental myopic attention on one issue by allowing you to invest in a fund that has been well-researched to cover various issues with a significant impact on humanity.
An ethical ETF is a great avenue to use your money to do good by supporting socially and environmentally responsible companies and those that observe human rights and are managed with integrity. If you are unsure which fund suits you, identify your investment goals and values to help you filter through the available ETFs.