If you are an investor in the ETF industry, you will come across words such as sustainability, ethical investing, or sustainable investing. People are no longer investing in just any company that makes profits; they are looking for companies that are committed to environmental, social, and government awareness. If you want to be an ethical investor, you might be looking for a sustainable ETF that can earn you profits while maintaining your core values.
There are many sustainable ETFs in the market to invest in, but if it is your first time looking to invest in ETFs, you might be wondering which is the right one for you. There are over a thousand ETFs, and it can be difficult to select the best ETF to invest in. To help you find the best sustainable ETF, there are several tips and tricks you can use to fulfill your objectives.
Here is what to look for in an ETF that is sustainable!
An ETF That Is Sustainable Has a Low Total Expense Ratio (TER)
It has annual charges, which are relatively low compared to other types of investment. When selecting a sustainable ETF, you need to check its Total Expense Ratio (TER), which measures the annual charge you need to pay for owning that ETF. An ETF that is sustainable should have a low TER.
Some of them sometimes have hidden costs that show up in the ETF’s annual return. The hidden costs are used to deny investors profits, which is not ethical. If it has hidden costs, it is not sustainable, and you should avoid it.
The Tax Status
An ETF that is sustainable should have a clear reporting fund status. Every ethical investor knows that paying taxes on every income is crucial because failing to report income can lead to legal troubles with the tax collector. You should also check how income from ETFs is taxed where you reside.
The ETF Provider
Another important thing to look for in an ETF that is sustainable is the ETF provider. Most major financial institutions, such as banks, run ETFs. The reputation of the financial institution should determine if its ETF is sustainable.
To check if an ETF provider is a good one, look out for the following:
- The company’s policies regarding certain topics like climate change, social issues, and human rights, among others.
- Clear policies and essential information regarding the ETF.
- Access to ETF details and other documentation.
- No current investigation regarding deceiving investors.
- No recent cases of fraud.
- Clear information regarding the ETF and available customer support to explain anything you do not understand.
Source Of Funds
Most financial institutions raise funds from numerous shareholders, while others rely on certain individuals or companies. It is important to check the source of funds to ensure they come from a reputable source. If the funds are coming from an individual, check if the individual has any bad reputation or has been involved in questionable dealings in the past.
For example, if the source of funds is coming from an individual or company that does not support certain human rights, such as LGBTQIA+ rights, that ETF is not sustainable. You need to do thorough research on the source of funds to ensure that they come from a clean source, and if you find out the ETF is not sustainable after investing, you can opt-out.
Investing In The Future
You should check if the ETF provider is looking to invest in the future. Due to climate change and global warming, many companies are investing to ensure a better future for humanity. Many companies look forward to reducing their carbon emissions to protect the environment.
You should look for ETFs from providers with plans for the future in different industries, such as renewable energy, electric transport, clean water, and recycling, among others. However, you should be careful when looking at a company’s future plans because some use these themes to lie to investors. A company can claim they support clean energy, but they still use non-renewable energy that pollutes the environment.
An ETF That Is Sustainable Has Fair Trading Costs
When you purchase an ETF, you will incur order fees that might vary depending on the provider or broker. The spread between buying and selling price of the ETF is also taken into account; how high the spread is will determine the trading costs of the ETF. If the ETF has high trading costs, you need to check if there are any hidden costs in the spread and order fees.
Brokers and ETF providers want to make profits, but some use unconventional means to ensure they get their profits. An ETF is not sustainable if the broker or provider is too concerned with the profits because if the trading costs are low, the broker or provider will do anything to earn a profit, even if it harms the investors.
Use of Profit
The income from ETFs (interest or dividends) is usually paid directly into the investor’s platform or the broker’s account. You can choose to receive the funds directly, or if you are using a broker, they will receive the funds on your behalf. You can opt to withdraw the funds, or you can reinvest it back into the product.
An ETF that is sustainable should have the option of withdrawing your income when needed or reinvesting. If an ETF has the option of withdrawing income, but investors are denied withdrawing the funds and are forced to reinvest, you should avoid it. It is important to note that accumulation (capitalizing) ETFs do not pay income; the income is automatically reinvested in the ETF.
Investing In Sustainable ETF
As an ethical investor, before you select a specific ETF, you first need to know the characteristics of a sustainable ETF. The most important thing you need to do is scrutinize the ETF provider and see if they match your core values. If the company has a good reputation, you can invest in its ETF, but if they are doing something that goes against your moral values, you should avoid investing in its ETF.