Refresh Your Portfolio With Some Green (Investments)
Summary Sustainability is an investable opportunity. A variety of sustainable investment instruments will suit the unique risk tolerance of different investors. Sustainable-themed mutual funds are a good way to get exposure to this investment opportunity. Green investing, or sustainable investing, is the type of investment that intentionally seek sustainable, environmentally friendly outcome. Examples of green investing include the stock of a clean energy company, and a project finance to reduce carbon footprint of urban housing communities. Green investing is NOT just for tree huggers. A 2009 study shows that “carbon legacy” of just one child is worth as much as 20 times the emission saved by a person who drive a high-mileage car, recycle, use energy-efficient appliances and light bulbs, etc. With global population projected to reach almost 10 billion by 2050 ( link ), the subsequent exponential growth in carbon emission will make sustainability an ever pressing concern. Sustainability is an investable opportunity. Everyone’s portfolio needs a refresh with some green in it. The good news is, there have already been a plethora of options to suit the unique risk tolerance of different investors. The options span from conservative fixed income instruments (rated as high as AA) to nano-cap high risk stocks, any many things in between. Green investing is not just project finance. One big misconception about green investing is that the underlying investment is some obscure high-tech project in the field that may or may not turn a profit. Granted, project finance is needed for global sustainability and large banks like Deutsche Bank are actively involved in it; however, many actively traded stocks and fixed income instruments allow retail investors to tap into the theme, too. In this way, with reasonable capital commitment and a diversified portfolio, retail investors are on the right path to realize positive returns with minimal project risk. Below I will discuss just a few such investments. The true scope of available instruments is far beyond what I can cover here. Indices A handful of green-related indices already exist in the market place. These are easy ways to track the performance of green investment, which is useful for benchmarking relevant mutual funds and ETFs, which I will touch on later. But first, a brief overview of the key sustainability indices. Dow Jones Sustainability Indices (DJSI) Family Launched in 1999, the (DJSI) were the first global equity indices tracking the financial performance of leading sustainability-driven companies globally. Various sub-indices are available for different regions, such as DJSI World, DJSI United States, and DJSI Eurozone etc. A stocks is only selected if it scores high enough in an integrated assessment of economic, environmental and social factors. Dow Jones conducts annual assessment to ensure the index components remain best-in-class in their sustainability outcome. Due to the methodology, invariable most companies selected are public, large-cap companies. These companies, such as Abbot Labs (NYSE: ABT ) and TD Bank (NYSE: TD ), have long track record as successful companies. S&P Green Bond Index (SPUSGRN) This is the fixed income cousin of the DJSI. A first-of-its-kind index, the S&P Green Bond Index is designed to track the global green bond market. The index was only launched in July 2014. For a bond to be included in the index, the bond issuer has to explicitly disclose the use of proceeds or its compliance with the Green Bond Principals has been independently verified. The index is characterized by medium duration (5 years) and relatively low risk with Yield to Worst of 1.8% Index Funds There are a handful of green index funds available. Even the grandfather of index investing, Vanguard, offers the Vanguard FTSE Social Index Fund (MUTF: VFTSX ). Again, this shows green investing is serious business. Instead of repeating the long list, here I recommend a few for different types of investors. If you are just tipping your toes in to green investing – the TIAA-CREF Social Choice Equity Fund (MUTF: TICRX ) The TIAA-CREF Social Choice Equity Fund is open to both institutional and retail investors. If you are just dipping your toes in this new category, TISCRX allows you to test the thesis for as low as $250. The fund’s style is mostly large-cap U.S. stocks balanced between growth and value stocks. Its solid track record makes the fund a wise investment decision by itself too- the fund has returned 0.24% YTD and 16.2% for the past five years. If you are laser focused on net returns – the DFA U.S. Sustainability Core 1 Portfolio (MUTF: DFSIX ) The DFSIX has stood out among green mutual funds for its stellar performance. Returning investors 2.8% YTD, its annualized return for the past five years is impressive at 17.9%. The fund’s style is mostly large-cap U.S. stocks balanced between growth and value stocks. The fund’s its top holdings include Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ), and Exxon Mobil ( XOM). Better yet, as an investor you get to keep most of the performance, as the fund’s expense ratio is only 0.32% If you have a more global taste – the New Alternatives Fund ( NALFX) The New Alternatives Fund, managed by Accrued Equities, devotes about 60% of capital to non-U.S. stocks and the rest to domestic stocks. With a slightly elevated expense ratio of 1.08%, the fund gives investors exposure to global stocks that focus on alternative energy. The fund is co-managed by the fund’s founder Mr. Schoenwald since 1982 and Mr. Rosenblith since 2010. Year to date, the fund has returned a respectable 13.7% and it annualized a sound return of 10.6% in the last 5 years. An ETF Pick – the PowerShares WilderHill Clean Energy Portfolio ETF ( PBW) PowerShares WilderHill Clean Energy Portfolio ETF is a clean energy ETF; ETFs are similar to index funds but trade like stocks. PBW is composed of over 40 stocks, with an expense-ratio cap of 0.6%. Some of its top holdings are in Tesla (NASDAQ: TSLA ), which manufactures electric cars, and Ameresco (NYSE: AMRC ), which provides energy efficient solutions to electricity providers and consumers alike. The above is a just a sneak peak of the plethora of green equity funds available. For fixed income funds, a whole new dynamic of public-private partnership is at play as well. In future post, I will explore select fixed income instruments, especially those with innovative structure here and abroad. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.