Tag Archives: environment

Socially Responsible Investing: 3 Funds That Are Beating The Market

There’s a powerful trend emerging in the investing world. Investors are building portfolios based on their morals and values. Dubbed “socially responsible investing,” or SRI, these investors align their investments with their values by avoiding companies with poor environmental, social or governance practices. Like their counterparts, sustainable investors also want to earn a good financial return on their investment. They don’t want to sacrifice performance for social impact. And these days, they don’t have to. For the last several years, the returns on socially responsible investments have risen sharply – and many are beating the S&P 500 What’s driving the boom in Socially Responsible Investing? Socially responsible investing funds have been enjoying increasing popularity, largely due to the emergence of “impact investing” – a feel good concept that started in the U.K. The difference between the two is that socially responsible investing avoids investments that are inconsistent with the values of the investors while impact investing actively pursues a specific positive impact. For example, funds that don’t invest in companies that make alcohol, tobacco, gambling and weapons are considered socially responsible investments. A more targeted approach, impact investing addresses specific issues like sustainability, women’s rights, the environment and more. Just how popular is SRI? In 1995, there were only 55 mutual funds that engaged in SRI, with $12 billion in assets. Today there are nearly 500, with assets exceeding $500 billion. What’s In It for Investors? Socially responsible investing looks a lot different than it did just a decade ago. As SRI has evolved, the advantages for investors are numerous: SRI investors now have more investing options, with the number of funds growing rapidly. There is also increased diversification of the investments within the funds themselves, which results in less risk to the investor. Investors can now invest in socially responsible Exchange Traded Funds (ETF). There are funds of various market capitalizations and investors can choose from domestic, foreign and global funds. Investors can select a fund whose strategy and social responsibility agenda are similar to that of their own social and financial objectives. Socially Responsible Investing Is Beating the Market Socially responsible investing no longer means you have to sacrifice returns on your investment. The once meager returns of socially responsible investments have improved considerably, even beating the S&P 500. Consider the following: The Index which tracks the equity performance of socially responsible funds, Focus iShares MSCI USA ESG Select Social Index Fund (NYSEARCA: KLD ), has outperformed the S&P since 1990, with an average annual total return of 10.46% compared with the S&P 500’s 9.93%. Benchmark performance of the MSCI KLD 400 Social Index, which includes firms meeting high Environmental, Social and Governance (ESG) standards, has outperformed the S&P 500 on an annualized basis by 45 basis points since its inception (10.14%, compared to 9.69% for the S&P 500; July 1990-Dec. 2014). Not all SRI funds beat the index, but it is remarkable how closely most of them track the market as a whole. Here are some ways to add socially responsible investing to your portfolio. At the time of this writing, I do not own a position in any of the funds mentioned in this article. Socially Responsible Investing: iShares MSCI KLD 400 Social ETF For investors looking for an easy way to add socially responsible investing to their portfolio, the iShares MSCI KLD 400 Social (NYSEARCA: DSI ) is worth a look. DSI posted a 35.5% return in 2013 – beating the S&P 500. DSI posted a 12.2% return in 2014, underperforming the S&P 500 by less than 2 points. The ETF’s underlying index tracks 99% of all the stocks in the United States and includes firms with a variety of market caps. The socially responsible ETF currently tracks 400 different firms and charges 0.50% in expenses. Technology and health care firms make up the bulk of DSI’s holdings. Socially Responsible Investing: iShares MSCI USA ESG Select ETF Investors wanting to eliminate the volatility of owning smaller firms from their portfolios should consider the iShares MSCI USA ESG Select ETF. The $350 million ETF includes U.S. large-cap and some mid-cap stocks which have been screened for positive SRI characteristics. It currently includes almost a hundred different stocks – with top holdings in 3M (NYSE: MMM ), Microsoft (NASDAQ: MSFT ) and renewable energy utility NextEra Energy (NYSE: NEE ). Expenses for KLD are also 0.5%. The socially responsible investing fund has consistently posted solid returns over the last several years. In 2013, KLD posted a 31% return, which was slightly less than the benchmark index, although KLD had beaten the index for the past 5 years. In 2014, KLD posted a total return of 13.5%. Socially Responsible Investing: Huntington EcoLogical Strategy ETF The often overlooked Huntington EcoLogical Strategy ETF (NYSEARCA: HECO ) focuses on various firms making efforts on environmental issues and sustainability. It’s a well-diversified, moderate risk, capital appreciation fund. HECO focuses on “ecologically focused companies,” firms that have positioned their businesses to respond to increased environmental legislation, cultural shifts toward environmentally conscious consumption and capital investments in environmentally-oriented projects. HECO holds more than 50 different companies including Starbucks (NASDAQ: SBUX ) and Texas Instruments (NASDAQ: TXN ). The returns have been strong. HECO returned nearly 30% in 2013 and narrowly outperformed the benchmark in 2014. Expenses for the ETF are slightly high at 0.95%. Final Thoughts You don’t have to give up performance to invest with your conscience and make a difference. Serious investors interested in socially responsible investing no longer have to sacrifice investment returns for their morals. And the easiest way to add SRI to your portfolio is an Exchange Traded Fund such as the funds mentioned above. The information provided is for informational purposes, not a recommendation. As always, investors should consider their own financial objectives and time horizon when making investment decisions. Diversification and asset allocations are important considerations. Sources: 5 ETFs for the Socially Responsible Investor by Dan Kaplinger Socially Responsible Investing With ETFs by Greg Lessard Socially responsible investing has beaten the S&P 500 for decades by Jennifer Openshaw.

TransCanada – It’s Not The End Of The World, Rather A Buying Opportunity

The president has finally rejected TransCanada’s Keystone XL pipeline. The decision seems more political than economical, but it is bad for TransCanada which has already spent $2.4 billion on the project. Although the market has been focusing on the future of Keystone XL, TransCanada has other projects in its pipeline that could fuel its growth in the coming years. Energy East could be the biggest growth driver in the long term, but the management has laid emphasis on a number of small projects. Earlier this month, the Obama administration finally rejected TransCanada Corp. (NYSE: TRP )’s Keystone XL pipeline on the grounds that the project was not in U.S. national interest and could reflect poorly on the country’s global leadership in protecting the environment. The decision, which was widely anticipated, finally concludes TransCanada’s seven-year efforts in getting an approval for the 830,000 barrels a day pipeline from the current administration. The decision seems more political than economical. It is difficult to imagine how a 1,179-mile pipeline spread over six states which would have mostly carried crude from Canada’s oil sands, but also up to 100,000 barrels a day of North Dakota oil, to Gulf Coast refineries would not lead towards meaningful economic benefits for the U.S. and Canada. Besides, the State Department’s environmental review , released in Jan. 2014, had already stated that the construction of the pipeline will not have any substantial negative impact on the climate. On the contrary, the rejection could increase the Canadian oil sands producers’ reliance on rail for delivering the crude to the U.S., which is far more carbon-intensive than the pipeline. Nonetheless, the decision is bad for TransCanada which has already spent C$2.4 billion on the project. A significant chunk of the expenditure could be written off as non-cash pretax charges in the coming quarters. The investment which related to the physical pipeline and equipment, however, can be utilized on other projects. As I have discussed previously , TransCanada has several options on its table following the rejection. The company can seek remedies under the energy chapter of the North American Free Trade Agreement, construct a rail loop that would connect U.S. and Canadian pipelines, or simply wait until a new U.S. president arrives in 2017 and then file another application. However, it is also important to note that the rejection is not the end of the world for TransCanada. Although the company’s stock declined 5.2% on the day of the rejection and has failed to completely recover completely since, I believe this could be an interesting buying opportunity. Although Mr. Market has been largely focusing on the future of Keystone XL, TransCanada has several other projects in its pipeline that could fuel earnings and cash flow growth in the coming years. This includes the giant Energy East pipeline which is bigger than Keystone XL in terms of investment, capacity and impact on the bottom line. Energy East, which comes with a price tag of more than C$12 billion as opposed to Keystone XL’s C$8 billion, will be able to ship up to 1.1 million barrels of crude per day from Alberta to Eastern Canada. Once Energy East becomes fully operational by 2020, it can lift TransCanada’s annual earnings (EBITDA) by C$1.8 billion. Keystone XL, on the other hand, was supposed to generate annual earnings of C$1 billion. Overall, excluding Energy East and Keystone XL, TransCanada has a backlog of C$15 billion of commercially secured major projects that can lift its annual earnings by more than C$1 billion in the long-term, according to my rough estimate. Energy East pipeline What’s even more interesting is that during the recently held investor day (Nov. 17), TransCanada emphasized that in addition to the major projects, it also has a C$13 billion backlog of eleven smaller projects, none of which require investment of more than C$1.4 billion, which will drive its growth over the next two years. Some of these projects, such as the Houston lateral and terminal, Topolobampo, Mazatlan and Canadian Mainline, will begin to contribute to earnings in 2016 while some of the bigger ones with capital cost of at least C$1 billion each, such as the liquids pipelines Grand Rapids and Northern Courier, will fuel earnings growth beyond 2016. Overall, the small and large projects are forecasted to drive 8% to 14% increase in annual earnings through the end of the decade. This will lead towards an average of 8% to 10% increase in dividends in each year through 2020. That’s higher than the CAGR of around 7% witnessed over the last fifteen years. Thanks to the recent drop following Keystone XL’s rejection, the stock is already offering an attractive yield of around 5%, which is higher than the industry’s average of 3.2%, according to data from Thomson Reuters. I believe the recent weakness could be an opportunity to buy this pipeline stock and earn strong returns in the long-run.

Vanguard Extend Duration Treasury ETF: Long Duration Could Be Great In December

Summary The Vanguard Extend Duration Treasury ETF gives investors exposure to the very long end of the yield curve. The yield is material but the price swings on long duration treasuries easily dominate the yield in determining annual returns. I won’t be surprised if the Fed hikes short term rates in December, but I don’t think they can continue to push up short term rates after that. If investors buy into the Federal Reserve’s picture, there could be some great sales on long duration treasuries. The Vanguard Extend Duration Treasury ETF (NYSEARCA: EDV ) is a solid option for exposure to treasuries. The ETF has an expense ratio of only .12%. As I’ve been searching for appealing bond funds, I’ve found some of my favorites are from Vanguard. Given my distaste for high expense ratios, it should be no surprise that the Vanguard products would be appealing. After looking through the portfolio, I think the holdings are fairly reasonable for an investor wanting to regularly keep part of their portfolio in a bond fund. Quick Introduction The Vanguard Extend Duration Treasury ETF is showing a yield to maturity of 3.0% and an average effective duration of 24.6 years. This isn’t an investment that investors should take lightly when it comes to interest rate risk. In my opinion the big reason to use such long duration securities is to reduce total portfolio volatility due to the negative correlation with the market or to make a play on long term yields falling and creating substantial capital gains. Maturities I grabbed another chart to show the effective maturity on the securities: That shouldn’t be surprising given that the effective duration of the fund was running almost 25 years. December The reason I’m looking to keep an eye on the very long duration securities in December is because of the Federal Reserve’s constant pressure to try to increase rates. If they actually get the short term rates higher there may be a shift up across the entire yield curve. The greatest price volatility would come from the long duration bonds. To avoid sensitivity to credit risk, I may opt to use treasuries rather than corporate securities. The Rate Issue The Federal Reserve has been talking for years about raising rates and they finally got some ammunition in November when the “jobs report” came out and indicated that unemployment levels were lower than expected and lower than the previous measurement. The Federal Reserve has an opening and they could use this opportunity to push interest rates higher. I think there is a fairly significant chance of that happening. The latest probability numbers from the CME Group, which uses the “Fed Funds Futures” to track implied probability, is shown below: (click to enlarge) We’re expecting around a 70% chance of short term rates getting a slight boost. I don’t believe that the Federal Reserve can continue to raise rates in the manner that they would like to, but I do think that an increase in short term rates finally happening could create a serious hit in the value of long term treasuries as investors start to buy into the idea that the United States will be creating higher interest rates on treasuries while most of the developed world is showing significantly lower rates. I wouldn’t be surprised if the Federal Reserve raises rates in December and sends bond prices falling. If that happens, I would consider it more likely that they would be forced to go back down on rates in 2016 rather than being able to raise them again later in the year. If short term rates went back down, I think it would be an admission of the difficulties of raising rates in this environment and the 30 year yields would fall. A falling 30 year yield would push prices on EDV materially higher. Conclusion This is a great treasury ETF with a low expense ratio and it should be on the “watch list” for investors going into December. If the Federal Reserve manages to raise rates and the 30 year yields rise (prices fall) materially, then I think it will become a fairly attractive option. I’ll be looking at long duration treasuries in December as a possible way to reduce my portfolio volatility and capture some significant gains if rates fall back down. Over the last year, EDV has had a negative correlation with the S&P 500. This wasn’t a slightly negative correlation either, this was -.41. This serves as potentially a useful hedge against my equity positions while giving me the potential to benefit from falling yields and rising prices if the Federal Reserve is unable to follow through on their plans to raise rates. My view on price movements is a significant chance of prices going lower into December followed by attractive buying opportunities to create capital gains in 2016.