The importance of sustainability has been on the rise. More investors are now concerned about how certain companies impact the environment and society as a whole.
While there are currently only a handful of ETFs that focus on sustainability, there is plenty of opportunity to grow this segment. As more people demand sustainable products and services, companies will respond by introducing new green products and services that cater to the growing market for sustainable goods and services.
If you’re looking to add more sustainable ETFs to your portfolio, keep reading for helpful tips on how to select them successfully.
1. Research the Companies Held By The ETF
The first thing you should do when selecting sustainable ETFs is to look at the underlying holdings of the ETF. Every ETF has underlying holdings, which are the companies that the ETF invests in. Understanding the underlying holdings can help you understand the potential risks of investing in the ETF.
2. Take a Step Back and Think About Why You’re Investing
While selecting sustainable ETFs is vital, selecting them for the right reasons is also important. For example, if you’re investing in sustainable ETFs because you believe sustainable practices will lead to more profitable companies, you’re likely to be disappointed.
3. Watch Out For Marketing Hype
When you choose sustainable ETFs, you’ll notice that some are more heavily marketed than others. If an ETF is heavily marketed, that’s usually a sign that it’s not very good. After all, if the ETF was a good choice, why would the fund manager need to heavily market it to investors?
Don’t select sustainable ETFs just because you think they’re trendy. Select them because they fit your risk tolerance level and investment strategy.
4. Watch Out For Excessive Fees
When you’re selecting sustainable ETFs, make sure you select ETFs with low expense ratios. Excessive fees can dramatically reduce your net return. For example, if you invest $10,000 in an ETF with a 1% expense ratio, you’ll end up with $9,900 after one year.
That’s not what you want when you’re investing for the long term. You want to select ETFs with low expense ratios so your investment will grow over time.
5. Assess Your Risk Tolerance
Knowing how much risk you’re taking on when selecting sustainable ETFs is important. If you select ETFs that are heavy in the utility industry and/or real estate industry, you may be taking too much risk for your portfolio. After all, those two industries are very sensitive to economic uncertainty. If you’re not certain where your ETFs are invested, you may want to contact your fund manager and find out. You may be surprised by what you find out.
6. Look At Past Performance
When you select sustainable ETFs, it’s important to look at past performance during different economic cycles. For example, you may want to see how sustainable ETFs have performed during economic recessions, moderate economic growth, and periods of rapid economic growth.
If an ETF has performed well over the past few years, that’s usually a good sign that the ETF will continue to perform well in the future.
7. Look At Management Team’s Track Record
As you’re looking at sustainable ETFs, it’s also important to look at the fund manager’s track record. You want to select ETFs with fund managers who have a long track record in the industry and consistently generate strong returns. This will give you confidence that the manager will continue to produce sustainable returns.
Summing It Up
The negative impacts of climate change and growing concerns about natural resource scarcity have made investors more aware than ever before of how companies impact the world around them, not just their bottom line. While these funds may be right for some investors, others may find them too niche or limited in scope. If you fall into the latter category, the tips above should help you learn more about selecting sustainable ETFs.
