by Neal Frankle, CFP ®, The article represents the author's opinion. This post may contain affiliate links. Please read our disclosure for more info.
Green mutual funds are no longer a fad. The idea of investing in companies and technologies that make our world a better, cleaner place has merit. But if you want to find the top green mutual funds, be clear on two things before you start your search: your motive and priorities.
Are you primarily concerned about making money? And is “green investing” a secondary consideration? If so, you’ll be able to cast a wider net. Simply compare mutual funds, find the best ones and then weed out those investing in the wrong companies or industries.
You can do that by looking at your fund’s prospectus or going to the fund’s website. You’ll easily find the top holdings – or all the holdings a fund has.
But let’s say making money isn’t your main goal. Let’s say you want to support certain industries like solar or wind energy. If this is the case, you’re probably going to be best served by finding an ETF that is focused in these industries. Better yet, invest directly in the companies you want to support.
Now, if your main motive is political rather than financial, don’t get confused down the line. Forget about short-term performance. My experience tells me it’s impossible to make smart investments when you have more than one main objective.
This is not to say that you can’t make money investing in green mutual funds or individual companies. I am sure you can. But if you expect to go green and also own top performing funds, you’re going to face long periods of disappointment.
There will be periods when green mutual funds do well. But it’s such a narrow niche that over many years, your fund won’t often be among the top performers.
Another word of caution: not all funds that claim to be green actually are. Actively managed funds are managed with great discretion. As a result, while many hold themselves out to be green, some may not be.
In fact one major green fund advertised as green and socially responsible, but the top ten holdings include IBM, General Mills and 3M. This is closer to a large cap fund than a green fund.
As I said before, if you compare ETFs versus mutual funds, ETFs are probably a better bet because they are more transparent and leave less discretion to the fund manager.
Now, if you are a fan of capitalism, you might not want to target green funds for investment but simply invest in top performing funds. If the green mutual funds do well, they’ll rise to the top and get on your buy list that way. To be frank, that’s my approach.
Do you invest in green mutual funds or companies? Do you hold those investments up to the same scrutiny as your other investments? How have they done so far? Do you even care about the performance?
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Comments
Greg McFarlane says
My Altria stock is riding a 52-week high or close to it right now. Altria, a company that kills thousands of its own satisfied customers every year.
It’s adorable that some people think that investing in Trina Solar or Vestas Wind Systems will somehow legitimize these companies in the eyes of fellow investors.
If you want to save the planet, plant a garden and convert a few more cubic meters of CO2 to oxygen every year. Investing in a solar power company because you want so badly for it to be the right thing to do, regardless of the entries on its financial statements, seldom is.
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benjamin says
I have a different take on this. Personally I invest 3% of my net income in “ethical investments” it doens’t need to be green though many are. I do this instead of donating to charity or tithing. My logic is if an ethical business gets of the ground it will have more of an impact on the world per $ than charity will.
I treat it like charity too. I’m not expecting it to make money if it does great but I’m not planning my retirement around it.
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Eric says
I just returned to investing at the end of a long debt recovery and like B2’s post for its realistic take on idealism. My own approach has been to diversify between idealism and reality. I’ve made single-stock investments in an “idea” company like Tesla (TSLA) and a real company like GE. I’ve also put a separate puddle of money into ETFs like Powershares Cleantech and iShares green fund (can’t remember the symbols right now). I don’t expect my idealist green investments to make a lot of money, especially compared to other actively managed funds, but with a fair amount of research, I feel I’ve at least chosen investments that won’t lose me money for my idealism. On single companies, I tried to find a few smaller companies that were just out of the VC stages (i.e., have recently had their IPOs) and hitting the market with products. But I tempered that risk with GE and Ford, which can scale up with either the product or the technology of smaller companies – figuring that if a company like Tesla has a truly great idea, a larger company will pay handsomely to mass-produce it.
As for charity, the Sierra Club will do the lobbying to turn government policy toward green – I’m just trying to get in front with companies and investments that will benefit from both consumer demand and government’s hand.
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Little House says
As I’m new to investing, something I’ve had in the back of my mind is wanting to invest in solar and wind energy only because I believe that somewhere in the future, these two energies will prevail. I guess in I’m willing to stick it out for the long run, then I’ll make money. But I am learning, don’t put all your eggs in one basket. I think I just need to make sure I’m well diversified.
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My Personal Finance Journey says
I have thought about this type of question quite a bit, stemming from a Jim Cramer episode where he discussed his take on green investments.
Unfortunately, I have to agree with Jim (even though I don’t support actively managed individual stock investing) in that when investing for retirement, you cannot discriminate between “green” and “non-green” (example = Exxon).
However, I am a big supporter in individuals investing in ETFs as mentioned in the post here or contributing to green initiatives. It just needs to be separated from your source of future income.
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Neal says
Thanks MPFJ,
I agree that with your idea of the need to keep these two items separated.
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