Exchange-traded funds (ETFs) are investment funds that own various assets, such as stocks, bonds, or commodities.
They’re often seen as a more affordable and diversified alternative to traditional mutual funds.
But with so many different ETFs available, it can be tricky when choosing ETFs that are the best fit for your portfolio—especially if you’re trying to adhere to certain ethical principles.
Here are different things to consider when choosing ETFs as an ethical investor;
1. Screen for Environmental, Social, and Governance (ESG) Factors
When selecting an ETF as an ethical investor, it’s important to screen for environmental, social, and governance (ESG) factors. ESG screening assesses whether a company or investment fund is aligned with certain ethical values. For example, you might use ESG screening to determine whether a company respects human rights, avoids environmental damage, or has good corporate governance practices.
There are a few different ways to do ESG screening. First, you can look for ETFs that explicitly state their focus on socially responsible investing in their descriptions. Alternatively, you can research specific companies or funds to see if they meet your criteria. Many online tools and databases can help with this.
2. Consider Your Overall Investment Strategy
Your investment strategy should always come first when choosing any investment, including ETFs. That means figuring out your financial goals, risk tolerance, time horizon, and many more. Once you have a clear idea of what you’re trying to achieve with your investments, you can start narrowing down your options and choosing ETFs that fit your needs.
For example, let’s say you’re nearing retirement age and want to preserve your capital while still earning some income from your investments. In that case, you might look for an ETF with low fees and a diversified portfolio of high-quality bonds. On the other hand, if you’re young and have a long time horizon until retirement, you might be willing to take on more risk in pursuit of higher returns—an equity-based ETF might be a better fit.
3. Read The Prospectus Carefully
Once you’ve found an ETF that looks like a good match for your portfolio, read the prospectus before making any decisions. The prospectus is a legal document that outlines all the important details about an investment product—including its fees, objectives, and risks. Pay close attention to the section on fees; remember that even seemingly small differences can add up over time if you’re investing a large sum of money.
If you’re having trouble understanding the prospectus or don’t feel like reading it all the way through, plenty of online resources can help you understand the key points—type “Ethical prospectus full guide” on your browser.
Key Takeaway
Choosing ETFs doesn’t have to be difficult. With so many options available, you can find an ETF that meets your needs and aligns with your values. Use this guide as a starting point in your research, and you’ll be well on your way to making an informed investment decision. Happy hunting!
