‘Green’ Funds Cost Three Times More Than You Think

Buying an ESG fund is a lot like buying in an index fund. That means investors are paying a lot for the small part that is different.

By Jason Zweig of The WSJ. Excerpts:

"At the average ESG fund, the effective fees can be three times what’s reported, according to a new study. That’s because these funds—also often called green, sustainable or responsible—are nowhere near as pure as they purport to be."

"Although some ESG funds take conservative or even “biblically responsible” approaches that favor industrial and other old-fashioned sectors, most seek to avoid companies that emit excessive pollution, consume precious natural resources, squelch labor unions, downplay gender equality and so on.

The inevitable result: They tend to favor software and healthcare, while tilting away from oil and gas. 

Sustainable U.S. stock funds have 22.1% of their assets in technology and 15.4% in healthcare, but only 2.6% in energy, according to Morningstar. Non-ESG funds, meanwhile, hold 18.7% in tech, 14.3% in healthcare and 5.7% in energy."

"green funds outperformed over the past five years, earning an average of 8.1% annually, while non-sustainable funds grew at 6.9%."

"Last year, however, tech went into the tank along with most of the market, while energy stocks were among the only winners. Green funds lost 19.7%, faring even worse than conventional funds, which fell 18.1%."

"Slightly more than half of studies on corporations showed that those adopting ESG principles improved their financial results. But only one in six studies on ESG funds found that these portfolios performed significantly better than average."

"The average green U.S. stock ETF charges 0.17% in annual fees, according to Morningstar—0.05 percentage points more than conventional funds."

"ESG funds have 68% of their assets invested in “the exact same” holdings as non-ESG funds."

"So, for every dollar you invest in a responsible fund, only about 30 cents goes into stocks you couldn’t have gotten in a fund that makes no show of trying to make the world a better place."

"Responsible portfolios aren’t less like the overall market than traditional funds. They are even more like it."

"non-ESG funds tend to own smaller stocks. But with green funds, on average, acting 98% like the mainstream stock market, you’re kidding yourself if you think they’re a distinctly different way to invest."

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For a humorous view of this issue see

A Snickers a Day Keeps the Doctor Away: Why does CVS want to make my migraine cures hard to find? by Joseph C. Sternberg of the WSJ (2017)