They say that the best time to start investing is yesterday (or even better, when you are a wee sproglet, earning your first pocket-money). The second best time is now. Yet, you don’t want to go throwing your money at something you don’t understand.
In 2016, we were at the beginning of discovering the world of Financial Independence Retire Early (FIRE). I was reading as many blogs as I could get my eyeballs on. I learned that the best way to reach FIRE was by investing, either in property or shares. We couldn’t just jump right in, though. While we were lucky that we didn’t have any debt, we did have to save an Emergency Fund before committing money to anything that had a higher level of risk than a bank account. I wasn’t going to play around with Mr. & Mrs. ETT joint funds before I knew what I was doing.
However, once I had all this knowledge, it was difficult to be patient. I really wanted to start. I was itching to get our money working harder for us. I wanted our dollars to start growing cents, then I wanted those little cents to grow into big dollars and have little cents of their own. The only way for that to happen is time. Compound interest has the longest gestational period of any beast!
My History with Acorns
To get some exposure and experience, I opened an Acorns account with my spending money. Mr. ETT and I both have (frugalists, cover your eyes now!) $100 a week dedicated to our personal spending. We hold this in separate accounts, and we can each do what we want with it without consultation. It saves all of those feelings that get stirred up when partners have different approaches to money. I opened my Acorns account with $200, and have committed $25 a week into an Aggressive portfolio.
Unfortunately, when I was digging around a bit in the portfolio, I discovered that one of the companies in the investment mix is Exxon. Rightly or wrongly, I will forever associate that name with the Exxon Valdez oil spill. I was a teenager when the disaster occurred. I still remember seeing the affected wildlife in news reports. 25 years later, the effects are still ongoing.
Now, one thing I have learned is that emotions should not govern investment decisions. You need to set your investment philosophy and plans, then use those to overcome the emotional reactions you have to markets. But since I saw this, it has niggled away at me. I feel dirty. I know nothing about Exxon other than the spill, so my reaction is definitely not factual. It is however clearly deeply ingrained in me. I admit that I deliberately chose to ignore it. As a beginner, finding ethical investments seemed too advanced.
In this case, my laziness and inertia has meant the solution has come to me. Acorns has added an “Emerald” portfolio, and they attribute it directly to Millennials. Thank you Millennials! Whether you call it sustainable, ethical, responsible, or just plain green, it seems like it aligns much better with my values. But before I go rushing to change the portfolio over (it’s as easy as clicking a button), I need to do some due diligence and look more deeply into what is on offer.
The level of risk of the Emerald portfolio is similar to the Moderately Aggressive portfolio, which targets “moderate to high expected returns with capital appreciation over the long-term”. The suggested timeframe for this investment is 3-5 years, which suits me just fine. The additional information to the PDS does note that only a portion of this portfolio has environmental, social or ethical considerations taken into account when choosing securities. I suspect this is because 27.3% is allocated to Australian Government Bonds and Cash.
It is important to note that Environmental, Social and Governance (ESG) investing will look different for every person. Just like identifying our values in the journey to FIRE, each individual will have to determine what is important to them in the field of ESG. Perhaps the care and consideration of people is more important to you than that of the environment. Or it’s more important to screen out companies that do harm, than to invest in companies doing good. There is no right or wrong way to invest ethically – it’s totally up to you. Having said that, let’s take a closer look at the two ethical ETFs included in the Emerald portfolio.
The Russell Australian Responsible Investing ETF fund invests in ASX-listed Australian shares and trusts. It offers franking credits, and has had a 4.53% return since inception on the 1st April, 2015. The fund is certified by the Responsible Investment Association Australasia (RIAA), the peak body representing responsible and ethical investors across Australia and New Zealand. They use both positive and negative screening in the search for appropriate investment opportunities.
And yet, look at the top 10 holdings of the fund. Highly weighted towards the big four banks, and there… is Woodside Petroleum. Delving deeper into the full list of holdings shows Caltex. And multiple mining companies. Sigh. But I guess it’s better to support companies that have demonstrated some commitment to improving practices than those who haven’t. In the words of Russell (emphasis my own), “The purpose of the Russell Australia ESG High Dividend Index is to provide an exposure to Australian equities which have demonstrated consistent commitment to environmental and social responsibility and higher governance standards.
The Betashares Global Sustainable Leaders ETF has a focus on environmental sustainability. It invests in global (non-Australian) companies that are leaders in the climate change space. Leaders are at least 60% more carbon efficient than average companies in their industry. Companies are also screened to ensure they don’t breach other factors generally understood to be important in ESG, such as “companies that have exposure to fossil fuels, gambling, tobacco, armaments, human rights concerns.” The fund has had an 11.85% return since inception on 5th January 2017. Being outside of the ASX, there is no option for franking credits.
From a personal point of view, this is what I expect an ESG investment to look like. In the future, I may well look at this fund becoming part of our portfolio.
What About Fees?
Fees can have a considerable impact on future returns from investment. Acorns base fee structure is to charge a maintenance fee of $1.50/per month on balances less than $5,000. This fee is not taken from your Acorns investment. Instead, it comes as a separate payment from your funding account. For balances greater than $5,000, Acorns charges an account fee of 0.275%, taken from your Acorns balance.
On top of this, each portfolio charges underlying issuer fees. These are the fees charged by the issuer of the ETFs held within the portfolio. Note that while the fees charged for the Emerald Portfolio are significantly higher than those for any other portfolio, they are still less than the fees charged if you were to invest in those ETFs directly. RARI has management costs of 0.45%, and ETHI 0.49%.
Using the ASIC MoneySmart managed funds fee calculator, with the following base data:
then the difference between my current Aggressive portfolio (0.287%) and the Emerald Portfolio (0.428%) would be $28. That’s only $5.60 a year. I am more than willing to pay the cost of a single expensive coffee a year to align my investments better to my values.
Acorns has a lovely Projected Value graph that allows you to manipulate your time in the investment, your regular deposits, and portfolio type to have an idea of the value of your investment after a period of time. Comparing my current Aggressive portfolio to the Emerald portfolio, after 5 years I will have $186 less. Add on $28 extra fees, the cost to me for switching will be $214, or $42.80/year. I’m willing to give up takeaway one night a year to be able to begin investing ethically.
Now I’ve written this post, I have gone and made the switch to my portfolio. It was literally a case of clicking on “Emerald” and then clicking the save button. There’s no fees or brokerage to change. Acorns will dispose of my old assets as needed, and acquire the new investments. Just like that!
What are your thoughts? Do you invest in any ESG or “green” investments? Would you be willing to pay the cost?
If you’d like to try Acorns for yourself, you can earn a free $2.50 by signing up using any of the links in this post (I will also receive $2.50). You can get started with as little as $5 (although with fees of $1.50/month I recommend building that up as quickly as possible.) You don’t have to invest in the Emerald portfolio – think about your goals and values, and choose the portfolio that best suits you, your risk level and your investment timeline.