Do You Have to Give Up Return to Invest Consciously?

I think many advisors have steered away from conscious investing in large part out of a fear that the investment limitations would result in lower performance for the client. Advisors hate this, because we are ultimately judged on our performance, and lower performance relative to the markets or other advisors can mean the loss of a client---and therefore, income.

Before investing for clients in conscious positions, I certainly held this view.  I was afraid that, by limiting the underlying managers I can choose from (via ETFs, mutual funds or separately managed accounts), I might be accepting lower performance. I needn’t have worried. There are many good options to choose from, and some have dramatically outperformed their competitors.  I studied a number of funds recently to prepare a new client allocation, and was pleasantly surprised by the results.

As a core holding, there is the S&P 500 Index Fossil Fuel Free ETF, symbol SPYX.  I have studied and used this fund now for a while; it correlates about 99% to the overall S&P 500 Index. I use it as my largest holding for such portfolios, anchoring the portfolio to the Index from a return perspective.  The investor has historically given up a tiny bit of return (less than 1% per year) to have a conscious position at the core.

As other large cap US holdings, the investor could choose from iShares Environmental Infrastructure (up slightly less than the S&P 500 last year), but could take a structured position approach. At about 1.9 times the return of the fund, with very low downside risk, the investor could have nearly doubled the market return with minimal risk of loss.  Another option would be Invesco MSCI Sustainable Future ETF; it was up about 22% last year, and a structured position could be taken at about 1.4 times the fund return, again with minimal risk.  

I was not holding Mid Cap or Small Cap positions for the most part last year, due to their earlier underperformance.  However, small cap stocks have heated up a bit recently, and I can place ESML (iShares ESG Aware US Small Cap) with a structured position at about 1.1 times the market return, with about normal market risk, or about market return with half of the market risk.

Where it becomes more interesting is the international area.  Here are some options that have me very excited.

Most tantalizing is FTHF (First Trust Emerging Markets Human Flourishing); I even love the fund name.  In the last year, it rose about 60%. I could accelerate that return by about 1.34 times with a structured position, with minimal downside risk.  If its performance level continues, that’s an exciting proposition.

iShares MSCI Global Impact ETF is another great opportunity.  It was up about 22% last year, and that could be multiplied by about 1.7 times, with low downside risk, in a structured position.  

Of similar interest is the iShares ESG MSCI Emerging Markets ETF. This was up about 47% in the last year, and a structured position could multiply this return by about 1.9 times! Again, with minimal downside risk. 

I’ve been holding some Artificial Intelligence exposure for my standard portfolios, and I was pleased to find a conscious option that did well last year, and would work well in a structured position.  The fund returned about 24% last year, and that can be multiplied by about 1.24 times with a structured position, assuming the client wants minimal downside risk.

There are more, but you get the idea.  A portfolio can be created that has a great opportunity to outperform the market, both to the upside and the downside---if current trends hold, of course.  There is no guarantee that they will, but the same goes for standard investing as well.

A core S&P 500 Index position, with large cap, small cap, international and AI satellites, holds the potential for strong outperformance and great downside protection.

Disclaimer:  These observations are not recommendations of any given investment position for the reader.  Structured Position opportunities are based upon Bloomberg indicative pricing.