The term “ethical” is not a generic definition.. People have different ideas about what it means to be ethical. Some may be religion-based or founded on what a person understands as being fair in doing business.
However, most everyone can agree that ethics are synonymous with the Golden Rule. “Treat others like you want to be treated.” Therefore, choosing an ethical fund closely aligns with this type of thinking.
In clearer terms, an ethical ETF is a fund whose sole purpose is to invest in stocks that are not considered harmful to the environment or to people. This type of fund is growing in popularity, as it often outperforms mainstream funds in business sectors. Therefore, stocks in an ethical ETF might focus on biodiversity, water stewardship, or sustainable transportation.
Why You Should Know How to Pick an Ethical ETF
With so many different ETFs available to investors today, it’s important to understand how to pick an ethical ETF. An ethical fund is one which has been screened, evaluated, and assigned an ethical rating by one of a number of organizations specializing in this field.
Therefore, ethical ETFs provide an opportunity for people who want to invest in something other than profits. They are made of stocks that hold companies responsible with respect to environmental and social obligations.
They also come with a risk that is not associated with traditional stocks and bonds. The following information will detail everything you need to know about ethical ETFs so you can make an informed decision on whether or not this type of investment is right for you.
Who Determines Whether or Not a Fund is Ethical?
The criteria for determining the ethical rating of a fund will vary between organizations. There are some organizations that only grade individual stocks, while others also rate funds. They do this by assessing a company’s environmental, social, and governance, or AGE, score.
Which Factors Determine an Ethical ETF?
A number of factors are used to determine an ethical ETF. Some of the key considerations include the fund’s investment strategy and methodology, the composition of the fund’s underlying holdings, the fund’s management and the fund’s corporate governance policies. The investment strategy and methodology of a fund will determine how it may respond in various market conditions. It will also give you an indication of how the fund will react to certain events.
The composition of the fund’s underlying holdings reveal what commodities, industries or sectors the fund holds. It can help you determine if the fund is appropriately diversified, and whether the industries the fund is invested in match your risk profile and environmental values.
The fund’s management approach reveals its track record. For example, you can find out how long the current fund manager has been in charge, and learn more about the fund’s parent company. The fund’s corporate governance policies show how the fund’s managers support shareholder values.
Keep the Letters ESG in Mind
Keep the letters for Environmental, Social, and Governance or ESG in mind when choosing an ethical ETF. These components cover a fund’s stance with respect to environmental concerns and how it treats the public and its employees. When it comes to ethics, ESG equates to the Golden Rule.