Are Your Investments Ethical?
A: Can I just start by saying thank you? It's not every day I get a question that makes me smile. I've said this over and over: The earlier you get serious about your money, the more successful you'll be. And your desire not only to do well with your investments but also to make sure that those investments do good for the world is a fabulous thing.
The funds you're interested in fall under the category of socially responsible investing (SRI). According to investment research firm Morningstar, there are now nearly 70 such funds, and they're all different. Some SRI funds focus on the negative, meaning they don't include any "sin stocks," such as those offered by companies that do business in areas like tobacco, alcohol, gambling, nuclear energy, or weapons manufacturing. Anything that passes the sin screen is eligible for consideration. Many funds go one step further by actively buying into companies with good records on environmental and social issues.
While I admire your not wanting to compromise your principles, you may have to make a concession on something else that's very important: performance. I'm a huge believer in keeping costs down to maximize your net returns, which is why I always recommend index funds and exchange-traded funds (ETFs). With annual expense ratios typically around 0.2 percent, they're the most cost-effective way to invest. (The expense ratio is the annual charge all investors pay to cover fund management costs.) But many popular SRI funds have expense ratios of 1 percent or more. The difference between 0.2 and 1 percent may not sound like much, but it can add up to thousands of dollars over time, so aim to keep your costs as low as possible.
Domini (domini.com) and Pax World (paxfunds.com) are two of the oldest and most respected SRI fund companies. The Vanguard FTSE Social Index Fund has very low costs (an expense ratio of just 0.24 percent), but its performance has struggled the past few years. The TIAA-CREF Social Choice Equity fund has solid performance and a 0.32 percent expense ratio. I also recommend checking out socialfunds.com.