Yield is important, but without stocks from companies that produce weapons or emit a lot of CO2. This is possible with sustainable ETFs. But is it worthwhile for your portfolio?
An ETF allows you to invest in hundreds of stocks across various sectors simultaneously. However, you might choose not to invest broadly due to your commitment to sustainability. That’s where specialized sustainable ETFs come in. But how do they work? And are sustainable ETFs worth it, or are they yield killers?
First of all, you can effectively spread your risk with a sustainable ETF as well. We recommend three sustainable ETFs that comprise companies from various sectors, countries, and currencies.
Recommended sustainable ETFs by Finanztip
Two ETFs from UBS track the sustainable index “MSCI World Socially Responsible Investment (SRI) Index”: one that distributes dividends (ISIN: LU0629459743) and one that reinvests dividends automatically (LU0950674332).
These ETFs focus on developed countries and include around 380 stocks (the MSCI World includes over 1,400 companies). The proportion of US stocks is slightly lower than in the MSCI World.
Additionally, there is an iShares ETF that tracks the sustainable “Dow Jones Sustainability Index (DJSI) World Enlarged” (IE00B57X3V84). This includes approximately 600 sustainable companies worldwide, representing both developed and emerging markets. The US proportion is about 51 percent, which is comparable to the traditional global index MSCI ACWI.
How sustainable are these ETFs?
Both indices exclude controversial industries: alcohol, tobacco, gambling, weapons, nuclear energy, pornography, and genetic engineering. The two MSCI indices only include companies that have a very good ESG ranking, meaning they perform exceptionally well in the areas of Environment, Social, and Governance. MSCI assesses this using its own analyses.
For the DJSI World Enlarged, companies must complete a comprehensive questionnaire that covers over 100 pages of sustainability criteria.
Does sustainability cost you returns?
This is hard to determine since no one can predict which stocks will perform better in the future. However, from 2019 to 2023, sustainable indices actually outperformed traditional ones.
During this period, the MSCI World (the traditional investment) achieved an annual return of 13.7 percent. In contrast, the MSCI World SRI, the sustainable variant, achieved 15.3 percent per year. The DJSI World Enlarged also surpassed the traditional MSCI ACWI with a return of 14 percent per year compared to its 12.6 percent.
Ultimately, the decision lies with you. There is no guarantee which variant will perform better. However, with either choice, you are not making a mistake. It is crucial that you take steps to build your wealth.
