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Building a Socially Responsible Investing Portfolio

Perhaps you’ve learned about socially responsible investing (SRI) and have decided that you’d like to take advantage of this approach in your own portfolio, seeking to align your investments with your social or environmental goals instead of considering only risk and returns. Now the question becomes: How do you go about building an SRI portfolio? Do you have to change all of your investments, or can you tiptoe into SRI? We’re here to help!

A spectrum of SRI portfolios

You can think of your personal degree of SRI involvement within your investments on a spectrum. On one end of the spectrum, you might be “all-out,” and SRI doesn’t come into play at all. On the other end, you might be “all-in,” where SRI is completely embedded in every inch of your portfolio. And you might be somewhere in between. It’s okay to pick a point to start with and then move along that spectrum when you feel comfortable doing so.

All-out: The lowest level of SRI involvement is what we call “all-out.” This is the default starting point for most of us, where our investment decisions are all about meeting financial goals, earning good returns, and controlling risk. Social and environmental factors might come into play in your charitable giving or volunteer activity, but not in your investments. This is okay! And it’s where investors typically begin.

Exploring: At the “exploring” level, you might add an SRI fund to an otherwise non-SRI portfolio. You could for instance, sell a non-SRI fund in one part of your portfolio (for instance, a large-cap U.S. fund) and then buy an SRI fund in the same asset class. This way your overall portfolio is relatively unchanged, but you can have some exposure to investments that better align with your values.

Middle-of-the-road: At the “middle-of-the-road” level, you can take SRI options where you can easily find them and stick with non-SRI options otherwise. For instance, you might have a well-diversified asset allocation plan in mind and use SRI funds to fill most of the broad equity slots (U.S. large cap and small cap, international developed markets). You might also use SRI funds for diversified fixed income or corporate bonds. For categories with few or no SRI options, a middle-of-the-road plan uses non-SRI funds, such as in real estate, emerging market bonds, government bonds, precious metals, etc.

Focused: With a “focused” approach to SRI, you could specifically seek out investments across your entire portfolio that align with your SRI preferences. This can be done by picking off-the-shelf mutual funds, ETFs, and/or separately managed accounts for all of the asset classes you want to invest in, or by hiring an advisor who specializes in building portfolios to align with your SRI preferences.

All-in: The approach for an investor who is truly passionate about SRI is what we call “all-in.” With an all-in approach, you build an SRI portfolio from the ground up, researching your own underlying investments and putting them into a complete portfolio, security by security. While the all-in approach maximizes the alignment between the portfolio and your values, this approach can be time-consuming and difficult.

SRI tools you can use

Once you’ve decided where you want to be on the SRI portfolio spectrum, it’s time to pick your tools. Fortunately, you have some choices.

Mutual funds: There are more than 350 mutual funds identified by Morningstar as “Sustainable Investment – Overall,” which aligns with how Schwab classifies SRI. Most of these funds are actively managed, but there are some index-tracking options. While there are SRI mutual funds in nearly every Morningstar category, the largest number of options can be found (in descending order) in the U.S. equity, international equity, taxable bond and municipal bond asset classes. The ease of accessing these funds and their breadth across categories is a positive, but keep in mind that you can’t personalize a mutual fundyou own whichever securities the fund manager decides to own. And you usually can only get an update on the specific securities the fund owns once per quarter. Of course, there are also fees to consider, which can be as low as a tenth of one percent for some of the lowest-cost index funds to more than 2% in some instances.1

Exchange-traded funds (ETFs): There are more than 80 SRI ETFs based on the same “Sustainable Investment – Overall” data point from Morningstar, and unlike mutual funds, most of these are passively managed. These funds can be found in about 25 Morningstar categories, but the majority of funds are in the equity asset classes (U.S., international, and sector equity), with fewer options available in fixed income. Like mutual funds, ETFs do not provide you with flexibility to personally customize your portfolio. However, most ETFs provide daily disclosure of their holdings, so you can usually see exactly which securities are held by the ETF each day. Fees for ETFs are often lower than for mutual funds, since most ETFs track indexes; only one SRI ETF has an expense ratio over 1%, and there are more than 50 such funds with expenses under half a percentage point.1

Separately managed accounts (SMAs): An SMA is a portfolio of individual securities managed on an investor’s behalf by a professional asset management firm. There are SMA managers who offer socially responsible strategies. However, SMAs can also provide investors with the option of personally customizing their portfolios. This can be helpful if you know exactly which stock (or group of stocks) you would like to exclude. Finding SMAs is not as simple as finding mutual funds or ETFs, and costs tend to be higher than for mutual funds and ETFs.

Stock-by-stock or bond-by-bond research: If you want maximum control over your investments in order to align them to the highest degree with your social and environmental preferences, you can build a portfolio piece by piece by researching each security that you buy and evaluating its social and environmental quality. Obviously, this takes time and requires that you keep track of how the parts come togetherare you too exposed or underexposed to any sectors, countries, or asset classes? But if you really want to know what you own, you can buy your stocks and bonds one by one.

Putting it together

For an easy start to an “Exploring SRI” portfolio, consider picking a single mutual fund or ETF whose investment objective sounds like it aligns with your values. To go deeper into a “middle-of-the-road” approach, you might choose several funds in different parts of your portfolio, looking beyond the investment objective and actually examining what the funds own. If you want to move into a “focused” or “all-in” SRI approach, you might want to seek out more customized helpa separately managed account that lets you specify what you want to avoid, or an advisor who specializes in a style of SRI that matches your values. But if you want the best possible match to your own preferences, you might just consider doing all your own research and buying only those stocks and bonds that fit your SRI desires. The choice is yours!


1 Morningstar Direct data as of 4/30/2020

What You Can Do Next

Important Disclosures:

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 1-800-435-4000. Please read it carefully before investing.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Charles Schwab Investment Advisory, Inc. is an affiliate of Charles Schwab & Co., Inc.


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