[ask for advice] ETF portfolio with "responsible companies"

Hello Mustachians,
I’m 30 years old, living in Switzerland since 2021. I have 70k in France, 20k invested in a conservative manner in my third pillar account with my bank, and 80k to invest elsewhere. I save 3k per month. I recently opened an account with IBKR and plan to gradually invest this money.

My challenge is to invest in companies that I don’t have a negative opinion of. Here’s what I’ve found acceptable:

  • UBS ETF (CH) SPI Mid (CHF) A-dis: 20%
  • UBS ETF (LU) MSCI EMU Socially Responsible UCITS: 40%
  • Xtrackers MSCI World ESG UCITS ETF: 40%

I have several questions:

  1. Is the geographical distribution appropriate, or is it too focused on Europe? I consider Switzerland and the EU to be sufficiently diversified for my needs.

  2. If I understand correctly, the ETF based in Luxembourg will be subject to taxation in Luxembourg. Do you know the specific percentage of taxation?

  3. From your perspective, what would be your estimate for the annual difference in percentage return of my portfolio in comparison to VT after 30 years? just a bet

I am very new to this investment world so I am happy to receive any advice.

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3.:

I guess 0.1% in fees (probably a bit more), and it’s a large bet that FR/DE/NL/CH outperforms the US.

Definitely a losing bet in the recent history :slight_smile:

Thanks for your answer.
Note that the fees for the listed ETF (weighted correctly) give 0.22%.

I’m leaning towards European companies with strong ESG values as they align more with my vision compared to those in the US.
If I lose only 0.1%/ year, it is only 3k, so I accept the additional risk. But nobody has a crystal ball :innocent:

Well the biggest change vs VT is in overweighting EU/CH.

To get an idea, the annualized return difference between 100% VT and VT 40% / VEA 60% (similar idea as your portfolio) was 2%.

Ok maybe I can do this, then:

  • UBS ETF (CH) SPI Mid (CHF) A-dis: 20%
  • UBS ETF (LU) MSCI EMU Socially Responsible UCITS: 20%
  • Xtrackers MSCI World ESG UCITS ETF: 60%

I was thinking also on diversifying a bit more too (gold, emerging market, crypto), but I red several times that it was not advised.

Normally indexes are weighted on the capitalization of the companies they are part of.
When you are switching from a global market capitalization to a “diversified” one you are basically weighting more companies with lower capitalization (this is the case if you invest more in European companies or emerging markets). Alignment with personal values is a good reason (keep in mind that these values can change).
Emerging markets if not driven by personal values is a bet. They were on the rise at the beginning of 2000, in the last decade they performed poorly. Not clear what will happen, keep in mind that investing in economies with strong GDP growth does not guarantee good return on stocks (there is a good video of Ben Felix on that).

Regarding gold the opinions are mixed, but overall I don’t think negatives. Regarding cryptos the opinions are very polarized, if the focus is on responsible companies/technologies I would personally skip it (and I actually skip it for that reason :joy:), but of course if your values are different a small portion (e.g. max 5%) does not do much harm.

Here is an FT article about ESG greenwashing

"An explosion in the number of ETFs that invest according to environmental, social and governance principles is fuelling concern among regulators that fund managers are “greenwashing”: using misleading environmental claims to entice well-meaning customers "

" investors have to do their homework with real care to ensure that they choose an ESG ETF that matches their needs and expectations"

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Heavily disagree with the above statements that ESG Investing was Greenwashing and lead to bad performance. What matters is the implementation / HOW you perform ESG Investing.

There are very questionable ETF on the market. You can identify them based on “weighting” that is done based on an ESG Score, or that they only include leaders with the highest ESG Score. These ESG Scores are pretty much bullshit and you face major risks resulting from changes in ESG Score - which either lead to frequent inclusion/exclusion of shares or weight increases/reductions. Meaning there is plenty of front-running risk as well as trading and friction cost.

Good ESG Indices do nothing more than:

  1. Excluding entire sectors (like Coal, Petrol, …)
  2. Removing a very very small percentage of clear bad boys and laggards (the fewer the better)
  3. Otherwise invest as per Market Cap

You can identify good ESG Indices based on the fact that their market cap is very close to the non-ESG Index Universe (other than the excluded sector) and that they cover a similar amount of shares. Further, the top ~20 Stocks should be roughly the same size (max plus 25% or so; no share that has a lower weight but was still present) and in the same sequence than in the non-ESG Index. If an ESG Index gives a share a higher weight than another (vs. cap based weighting); you have an issue.

Based on these criteria - there is two very good fund families:

  1. Vanguards FTSE All Cap Choice Index Series, like V3AL (there is regional equivalents if you want to over/underweight a certain region)
  2. Credit Suisse’s SPI ESG Index Fund (NOT UBS’s SPI ESG Weighted ETF you listed above which is terrible)
    CSIF (CH) Equity Switzerland Total Market ESG Blue FB CH0597394532 | Credit Suisse Asset Management (credit-suisse.com)

Funnily… these ETF match the Cap Weighted Indices very closely and they all post a better performance. Over the last few years, it paid of to exclude oil and petrol stocks. This is remarkable, particularly considering the war in Ukraine.

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Sorry I did a mistake: my initial idea was to invest in UBS ETF (CH) SPI Mid (CHF) A-dis and not UBS ETF (CH) SPI® ESG (CHF) A-acc
I will edit the above messages.

Thanks for all your answers, it really helps.
What I understand is:

  1. High ESG does not mean anything, it is important to filter with your own idea. This is what I did and this is why I chose these ETF. For example, there is no bank, Nestlé, Amazon, CocaCola because I would prefer to not invest in these companies.
  2. If I filter with ideology, like I did, I will probably loose a 1-3%/year. The result can be big after 30 years and the question remains to buy non-ESG ETF and use the excess money
  3. There are high ESG ETFs that perform similarly to VT, but this requires a low amount of exclusion (nb of shares similar to non-ESG Index Universe).

FWIW: In the Xtrackers MSCI World ESG UCITS ETF you mentionned before, there are plenty of banks included.
See: MSCI World ESG UCITS ETF 1C (dws.com)

€: I would like to know what you think the impact will be if you do not invest in these companies?

Also the CH fund contains banks, Julius Baer making up 5% of it.

Also, I can understand coal, tobacco, junk food (I used to also understand weapons before Ukraine was invaded by Russia), but what’s wrong with banks?

the only thing that trully works is sector exclusion. Everything else is subject to each personals specific view on what “good” vs “less good” ESG behavior was. The traditional example - are Agrochemical Companies now good or bad? You can have both views and you won’t find a Fund that matches exactly your views. Even if it did - chances that it was such a niche and the fund would disappear after a few years is massive. My personal pitch: I exclude Oil, Coal & Weapons and post this call it a day.

Instead of ESG Investing - I would rather recommend you a “traditional portfolio wo/ a few sticky sectors” and something like 20% of impact investing where you very specifically chose an impact fund that matches your desires. There are wealth managers that do so for about 0.5% p.a. This part of the portfolio will then however not be there for the return but for diversification and good sleep. Hence, don’t let it go beyond 20% of total share exposure.

@Luk_nuts,
My main goal is to live in a way that minimizes the impact on nature, more in line with what I believe everyone should aim for. However, I’m not looking to completely change my habits. I know I won’t be a model, and my impact will always be more significant than that of a Nigerian farmer. My idea is to “do what you can to avoid feeling bad.” I understand it might not change the world, but it helps me feel better.

Take being a vegetarian, for instance. It’s already a significant change for me because I used to enjoy eating meat. But I’m not ready to go fully vegan because it’s too big a change for me.

I see a similarity when it comes to investing. Ideally, I’d stash my money away and do nothing with it because investing in big companies feels like supporting them, and I want to avoid that. The compromise I’ve made is to invest in companies I don’t strongly dislike.

@Giff,
I’m not in favor of supporting banks because they invest in oil, coal, and weapons. Their size is a concern, especially during a crisis, and their attempts at greenwashing make it seem like things are changing when they might not be. :stuck_out_tongue:

Overall, as you said guys, the difference is very minimal and it was just a way for me to accept to invest money in ETFs.
I will think about it and come back to you with either:

  • I accept to put everything in VT
  • I use @TeaGhost strategy with excluding certain sectors (though not as many as I originally intended)
  • I do not invest in ETF and find another solution

TL;DR for @Gabz (who possibly isn’t interested in wading through the toxic waste in these ESG sewers that I map out below):

Just buy your plain vanilla standard (non ESG) ETF most tailored to your beliefs, ideally with low fees. Then move on.
If you’re - on the other end of the spectrum - absolutist pure hearted about investing money conciously, take the time and put together your own portfolio of companies you can live with.
Reading your latest posts on this thread it sounds like you have already realized that ESG does not mean much. I would recommend to you to double down on that.

For the die-hards (be prepared to get a little dirty yourself as you are going to wrestle with an ESG pig):

Just echoing what @Koreba and @Barto already said, although they’re being nice (no offence, fellas :slight_smile: ). I won’t mince my words:

ESG is a scam, almost* any which way you approach it.

In the words of my gray haired several decades seasoned professional portfolio manager colleague: “ESG is just way to extract more fees out of customers. You don’t even have to force it onto customers, they demand it themselves and are willing to pay extra.”

Not to pick on @TeaGhost, but the simplistic view of excluding entire sectors (coal and petrol were mentioned)
(a) doesn’t work,
(b) is not what ETF providers do, and
(c) leads to the market and companies just adapting in terms of what is a public company versus a private holding:

  • e.g. shunning petrol means letting go of (or making more expensive) a bunch of other stuff. Here’s a bigger picture infograph for what life without oil looks like:


    If you feel you can defend shunning petrol, I’m … curious, I guess?

  • shunning coal strikes me as particularly sarcastic given our German neighbors just had to re-activate coal power stations as a result of their brilliant move (ok, I’m definitely also sarcastic) to shut down their nuclear reactors (which by the way also rate low on ESG scores …)

  • ETF providers pick an index they benchmark to (and that they usually hug more or less intensely, i.e. stay within defined limits of how far they stray away from the pure benchmark), and ESG index providers do the same, but they add to it a little secret ESG sauce (which costs dear money).
    Check this out:
    (i) The largest ESG fund (measured by AUM [Assets Under Management]) is the iShares ESG Aware MSCI USA ETF (NASDAQ:ESGU). See their top holdings below (courtesy Bloomberg):


    (ii) The largest ETF overall** is State Streets SPDR S&P 500 ETF Trust, modeled after the S&P 500 index. Here’s their top holdings:

    Indeed, there’s differences. You don’t need a microscope, but a magnifying glass is probably helpful. Like …
    … let’s pick supposedly “bad apple” Exxon Mobil, weighted at .8% in the ESG fund while being weighted a whopping 1.13% in the S&P 500.
    That makes a huge difference, doesn’t it.
    Holy moly.
    (No!).
    … or let’s pick my personal pet peeve, Meta Platforms. 1.67% versus 1.12%.
    What?!? META is evil, folks! It should be at 0% at the ESG ETF! Instead, it’s overweight?
    … or let’s pick Tesla, surely the North Star in terms of Enviroment, Social, and Governance (sorry, sarcasm again): 1.65% versus .95%
    Are you even paying attention?

    Just in general, across all hodlings: the allocation differences are minuscule! And you’re paying extra for this?
    I mean, c’mon!

  • Lastly (well, I could go on forever, but I feel I am stretching your patience already), companies will and have already just split off the negative-ESG creating parts of their companies and taken them private so the remaining public companies score higher ESG ratings (the private, split-off companies are of course not ESG rated).
    This shouldn’t come as a surprise to anyone believing in the “show me the incentives, I’ll show you the outcome” (attributed to Charlie Munger, who, BTW, also is not an ESG fan, just like Warren, his buddy).

So, summing things up: stay away from ESG, it’s a virtue signaling but return diminishing vehicle that benefits professional investors only.


* Ok, there may be one way to approach it: pick your stocks and leave out the ones you’re uncomfortable with. In my investment universe, for example, $META is a company I’ve shunned despite their prospect returns and return prospects.
** In fact, the top 4 ETFs with AUM topping a trillion dollars all index after the S&P 500.

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Oil price rallied all the way from mid 2020 through mid 2022. Some reversion was to be expected.

There’s nothing wrong or “less good” about indices that contain only the most sustainable, environmentally-conscious and peaceful companies. Even when you weight them by scores that try to measure these attributes. It’s just a matter of personal preference - and yours just seems to be investing by market weighting, only excluding a few (most egregious) “bad apples”.

I would agree though that one should carefully analyse and question how ESG are constructed (and possibly greenwashed or downright manipulated).

That’s conjecture. You may also overperform.

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Another solution:

:point_right: Construct your own portfolio of companies you like, with whose values you agree.

Just make sure you are reasonably diversified geographically and across sectors. And stay away from less-covered, sometimes hard-to-understand small caps or risky startups - at least unless you have done careful due diligence on them. The common rule of thumb is that 30 or so stocks make for diversified portfolio. Whether that will outperform or underperform an ESG index fund or ETF, will be anyone’s guess.

You can still use use ESG indicators/indices to pre-screen for stocks - or be inspired by, for example, Inyova’s selection (if you don’t use them to invest outright. You can also invest your pillar 3a with them).

You’ll not only make (much more!) conscious investment decisions but also don’t have to buy the one-size-fits-all portfolio from the index providers. And besides the learning process, you won’t pay the fund managers or index providers (though these savings in recurring fees and costs will probably come with some loss of tax efficiency on dividends).

With IBKR and 80’000 CHF at hand, it can certainly be done at reasonable cost.

Not just banks - insurers/reinsurers are dealing with companies who do oil/gas etc., so you’d have to exclude the entire financial sector.

Not sure this is a fruitful and can-be-kept-consistent exercise; others have already said - ESG ratings and investing are mostly a fad/greenwash.

I think the problem is everyone has their own definition of ESG.

Another approach could be to reward the company in each sector with ESG values most aligned to your own.
Example: you don’t like one oil company because they have bad environmental credentials and are funding climate change denial politicians, but another oil company is making efforts to carbon compensate or diversify to alternative energy sources

100%.

The issue, though, is that IMO the average (at least retail) investor probably thinks that ESG not only makes sense (which is a legitimate opinion one can hold) but that providers of ESG financial products have a somewhat uniform solid and reasonable way to select the “right” companies before an ESG label is slapped onto it.

The financial industry of course does its best to support that illusion. E.g. MSCI provides detailed ESG data on companies split across 100+ factors that a investment product company can subscribe to in order for the portfolio manager to “implement ESG”. Financial companies putting together ESG financial products often buy this data and maybe even use it.
It’s only when you read the fine print of the respective financial product that you find out that each investment product company does their own thing with this data (if they even got it in the first place).

This isn’t to say that there aren’t companies who will rigorously and algorithmically select companies for an ESG fund/ETF according to this detailed ESG subcategory data. In practice though, all these ESG financial products out there are on a spectrum, with the rigorous ones on the one end, and the “portfolio manager today thinks this company is fine, tomorrow though he might change his mind” on the other end.

Kind of reminds of the early phase of using the “organic” label for food. Until you define (quite tedious, and perhaps also not what every consumer will read up on, here’s a description of “Bio” labels in use in Switzerland) what “Bio” actually means, you don’t know anything about that “organic” labeled salad in your shopping basket.

Any which way, at the end of the day, as an investor, you would have to look at the prospectus of the financial product to see whether their implementation of ESG aligns with what you actually want.

I’m doubtful many retail investors will do this.

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