Mutual Funds and ETF Socially Conscious Investing

Worldview Investing Potholes to Avoid

In 2019 (November 15, 2019) I wrote a post about ESG investing. This is also known as “responsible investing.” Those who focus on ESG investing want to have a positive impact on the world and still make a profit. One fund I discussed was CCPIX (Calvert Mid-Cap Fund Class I Inst.) At the time of my review, CCPIX had a five-year return of 40.34%, which trailed the five-year returns of other decent investments. For example, VIMSX (Vanguard Mid-Cap Index Fund Investor Shares Inv) had a five-year performance of 51.15%.

ESG is Environment, Social, and Governance. Sounds wonderful, right?

CCPIX claims a lofty investing strategy. “The fund invests in stocks of companies that are deemed socially conscious in their business dealings and directly promote environmental responsibility.” That is certainly noble, but noble intentions do not necessarily translate into profitable returns. To add to the insult, CCPIX has an expense ratio of 0.93%, while VIMSX has an expense ratio of 0.17% and a better dividend yield.

What is “Socially Conscious?”

There is another factor to consider. What does it mean to be “deemed socially conscious” in their business dealings? What worldview drives this type of social agenda? As a Christian, I care about loving others and doing the right thing, but I don’t subscribe to the whims and fancies of modern man’s ideas of what is “socially conscious.”

CCPIX now has a five-year return of 6.87%, which by just about any standard is a terrible return on the investment. VIMSX, by way of comparison, has a five-year return of 48.67%. That isn’t terrific, but it helps illustrate that “socially conscious” sounds pious, but it may not be sensible and is probably at least a little self-righteous.

James Emanuel wrote an article posted on Seeking Alpha that was titled: “ESG Investing: How Right Becomes So Wrong.” In it he exposes some of the questionable investment manager hype. One of the temptations of ESG investing is that we all tend to have a moral compass that causes us to love certain things and despise others. For some, gambling, tobacco, and alcohol are destructive elements in society. Most investors don’t want to make money dealing in illegal narcotics.  Some investors think any investment in hydrocarbon fuel is planet-wrecking. Others despise the arms industry, unless of course, they are being attacked and want to be defended.

Professor Ashwath Damodaran

Emanuel goes on to say, “This has attracted criticism. Professor Aswath Damodaran at the Stern School of Business at New York University has recently launched a scathing attack on the ESG sector. ‘I believe that ESG is, at its core, a feel-good scam that is enriching consultants, measurement services and fund managers, while doing close to nothing for the businesses and investors it claims to help, and even less for society.’”

Feel-Good Bond ETFs

Sadly, even the bond market has been contaminated with this questionable thinking. Bond fund VCEB (Vanguard ESG U.S. Corporate Bond ETF) has 2,278 holdings making it a diversified fund. However, the five-year returns are -13.88%. When you add inflation to the analysis, this fund is a big loser. VCEB is not the exception to the rule. Fund RBND (SPDR Bloomberg SASB Corporate Bond ESG Select ETF) has a five-year return of -14.19%. In fact, I can easily make the argument that bond funds are not in the long-term investor’s best interests. Don’t be fooled into thinking “bonds are a safe investment.” Nothing can be further from reality except that bonds are probably a better investment than Bitcoins are.

Another Warning Flag

As my regular readers know, when you buy shares of an ETF or a mutual fund, you really should look at the top ten investments in each fund. Furthermore, you should consider how much of the total value of the fund is focused on the top ten. I looked at a couple of different ESG ETFs and found a common denominator. They all tend to be heavily weighted to the following five mega-cap companies: Microsoft Corp, Alphabet Inc (Class A and Class C), Tesla Inc, Apple Inc, and Inc. Therefore, if you buy shares of ESG ETFs like ESGV (Vanguard ESG U.S. Stock ETF) with a five-year return 46.07%, or ESGU (iShares ESG Aware MSCI USA ETF) with a great five-year return of 71.54%, be careful not to buy shares of an S&P 500 ETF like SPY (SPDR S&P 500 Trust ETF). If you do, you are really increasing your exposure to the top 25-30% companies including the top ten in ESGV and ESGU.


Don’t buy the ESG label. Read the fine print and understand the investment mix.

You may have come to the end of this post and are thinking, “so what?” I want my readers to be skeptical of or at least question moralistic self-righteous investment ideas. I am not suggesting that you set aside your convictions, but it pays to be practical in your thinking. There is no perfect company that is a perfect citizen in this fallen world.

Secondly, there are many ethical ways to grow your retirement assets. You don’t have to know everything about every company in an ETF or mutual fund. If you buy shares of VYM, as an example, don’t be surprised that a hydrocarbon fuel company is in the top ten. If you think carbonated soft drinks are bad, be aware the VYM has investments in Coca-Cola and Pepsi. The real issues, in my opinion, are the cost of the investment, the long-term growth of the investment, good diversification (without a focus on the mega-cap giants), and income growth. I don’t plan or hope to change the world by the investments I choose.