Quick disclaimer: I can’t recommend that readers perform the actions I’ve taken, so be aware while reading I’m not suggesting that everyone should follow my lead here. Please don’t, at least not before carefully thinking through the implications. Most people implement alternate solutions to solving their own moral dilemmas caused by index investing. (There are tons of good suggestions in the comments.)
Another mass shooting here in America occurred last weekend, the worst ever, half a hundred dead, a like number wounded, all caused by one crazy asshole unleashing not exactly unimaginable horror on innocents.
Of course, it’s not unimaginable because it happens all the fucking time in this country.
People want to know what they can do to help. Some people are giving blood. Obama is writing his congressperson. (For the record, you probably should too.)
I have removed major gun manufacturers from my portfolio, to the best of my ability. The trigger for me to do this wasn’t the latest mass murder in and of itself. Nope. It was the news that their stocks are surging in the wake of the tragedy. And I realized that I am indirectly making money off of this horrible event.
I will not waste much time talking about my particular views on guns, or gun control, other than to make a few basic statements.
- Allowing regular citizens to purchase rapid fire weapons which have been designed for one purpose only — to create holes in people where previously none existed — is ridiculous.
- All major gun manufacturers fully support the NRA both rhetorically and with large monetary donations. The NRA, in turn, opposes any and all adjustments to gun laws which the majority of U.S. citizens support. Examples include the creation of a national gun ownership registry or maybe not allowing people on the FBI’s terrorist watch list to purchase weapons of war which can take out an entire crowd of humans in less than a minute. The NRA dumps large amounts of cash into a) television advertising to advance their agenda and b) lobbyists who then directly influence our congressional representatives. And that influence is much, much greater than your own, because: Money.
Enough of that. You already have your own opinion on this, no doubt, and most likely nothing you read is going to change it, because it’s very, very hard for our type of animal to go back and update previously set beliefs after we’ve made our mind up about something.
You may think I’m getting all political, but I don’t see it this way. This is a public safety issue, plain and simple. I don’t subscribe to this country’s use of identity politics and so just because I’m upset about this issue doesn’t mean I’m digging at either side of America’s two-party system, R or D.
I’m simply fed up with seeing innocent people die and our government’s subsequent inability to do anything at all about it because: Deadlock. This is pretty much the only thing I can do — to vote with my dollars — so I’m doing it.
At any rate, let me just get to it. If you want to build a portfolio that excludes certain companies, you have a couple of choices.
Option 1 is to painstakingly check the holdings of your mutual funds to see if they invest a percentage in the stocks you want to move away from.
If so, you’ll have to find a comparable fund to move into which doesn’t own shares in those companies.
Most of my holdings are with Vanguard so I’ll work through through the process I followed with them.
- First I made a list of the companies I desired to move away from. Mine looks like this:
- OLN – Olin Corporation
- RGR – Sturm, Ruger & Company Inc.
- SWHC – Smith and Wesson Holding Corporation
- Then I cross checked these companies against the stock holdings list of your mutual funds. I
havehad significant money in Vanguard’s Total Stock Market Index (VTSAX) which aims to capture the entirety of the US market, so I was pretty sure I would get positive hits.
- Finally, I located a comparable fund that doesn’t contain these funds. For example, the companies I listed above don’t earn enough money to be in the S&P 500, so I performed a simple exchange. (Let’s hope that these companies never crack the top 500… I hesitate to imagine such a world.)
Note: Be sure to evaluate any tax implications of your exchanges prior to execution so that you don’t have a huge bill next April. Most people hold stocks in their taxable accounts, so if your holdings have gone up significantly and you make an exchange, this will count as realized gains that will generate a tax bill.
Luckily, if you are still in the accumulation phase of your retirement journey, the solution is much simpler: From here on out, push your retirement contributions into mutuals that more closely align with your values.
If your own funds are with another provider — say, Fidelity or State Street — and you are having trouble finding the exact holding list for your funds on their website, you can give them a call and speak directly to a customer service representative. Mutual funds are required by law to disclose a complete list of holdings on a quarterly basis and make this information available to investors.
Option 2 is to ditch index investing and pick individual stocks. I can’t wholeheartedly recommend this approach because a) I don’t believe individual stock picking is a successful investment strategy for your average person and b) you lose the benefits of diversification across a large number of companies. However, some people successfully people do it. Check out the DRIP crowd, for example. Personal hero Brave New Life took this approach to make his own early retirement dreams a reality, and I don’t see a single gun-related stock in his portfolio.
Despite my personal misgivings, this approach would definitely take care of your ethical issues. You could go all-in on Starbucks or something.
Some bonus reading if you’re looking for additional guidance: The Campaign to Unload. This is an organization that advocates removing firearm manufacturers from your portfolio.
What does this do to my potential earnings?
You tell me.
Can I Invest in Socially Responsible Funds Instead?
First, let’s get this out of the way:
The Vanguard socially responsible fund (VFIAX) continues to invest in gun manufacturers. I see OLN, RGR and SWHC all on the list, under “Leisure” holdings. I can only guess this is because so many mass murders occur in places of leisure, such as houses of worship, movie theaters, shopping malls, and dance clubs. </dark humor>
So, okay, VFIAX is not a solution to this particular problem.
But what if you don’t particularly care about companies that produce firearms? What if you’re looking to divest yourself of other corporations that you personally consider evil? Might you consider looking into socially responsible indexes to avoid pumping your own dollars directly into companies that make, say, nuclear weapons or cigarettes?
There are two major problems with this. The first is that you can’t directly control which companies you exclude. Some researchers have concluded the standards by which companies are held out are too lax and also prone to corruption and manipulation; they aren’t entirely objective.
Then there’s the earning problem. The Flannel Guy ROI says that a typical socially responsible portfolio will be worth 30K less than a normal indexed portfolio over 10 years, assuming 25K/yr invested.
That’s not chump change. He makes a strong case that it’s not worth it. I wanted to fact check him.
Luckily, Vanguard makes it fairly easy to do cross-fund comparisons so we can do our own analysis.
Let’s take a look at our options — investing in our socially responsible fund (VFTSX), versus the S&P 500 (VFIAX).
The socially conscious fund lags, winding up at about 18K over the 10 year period.
Let’s look at it a different way.
Here you can see the 10-year return on VTSAX (Total Market) versus VFIAX (S&P 500) is a paltry .03% — statistically insignificant, at least over that span. Since inception is another story – the total stock market has outperformed the S&P 500 by half a percentage point over the long haul.
The lower earnings risk grows much larger when you compare either of those funds against their socially responsible counterpart. That gap is at least 1% over the past 10 years, and even more when you go back further.
Going with the Flannel Guy’s example (25K/yr invested per year over 10 years), my math says the difference between earning 5.65% and 4.65% annually comes out to about 18K. And that number will just get bigger and bigger as the years go by. In addition, 1% appears to be best-case, so that 18K may wind up being closer to the 30K that Mr. Flannel stated in the first place.
Ultimately, I wound up with the same conclusion. Investing in the somewhat more-socially responsible VFTSX is almost certain to result in a significant drag on your earnings.
For the record, socially responsible funds are supposed to avoid — and this is according to investopedia — companies that have been fingered in causing a great deal of environmental or personal harm.
Pasted from the website:
… tobacco companies, manufacturers of nuclear weapon systems, manufacturers of whole weapons systems, companies involved in producing electricity from nuclear power, and businesses involved in the mining or processing of uranium…
I suppose automatics don’t qualify as “whole weapons systems” even though they are functionally “hole weapon systems.” (Ha. Ha. Not. Actually. Funny. Because: Real human lives.)
I contacted Vanguard directly to ask if they would consider the removal of firearm makers from VFTSX based on the above criteria. After four days of waiting for the email response that never came, I finally made the decision to call and push the issue.
And I’m really glad I did, because it gave me the opportunity to engage in a number of awkward conversations with reps that were not equipped to handle these questions.
Rep: Hi, my name is <low level moron>, thank you for calling Vanguard. What can I help you with today?
Doom: I’m interested in divesting from mutual funds which contain stocks in major manufacturers of guns. I have a list of tickers I’d like to exclude. I’m wondering if Vanguard has any guidance in this area.
Rep: Have you checked out our socially responsible index fund?
Doom: Yes. I found that your fund — that’s VFTSX if you care to look it up — invests in companies I want to exclude.
Rep: And what funds are those?
Doom: Let me read off the tickers: OLN, RGR, SWHC.
There’s a full minute pause as, presumably, the rep checks the holdings for VFTSX.
Rep: Yes, you’re correct, VFTSX has holdings in the stocks you’ve mentioned.
Doom: So does Vanguard offer any guidance for people like me that desire to no longer have anything to do with these companies?
Rep: I’m not sure. Can you wait on hold while I conference a more senior person into the call?
Doom: Of course, no problem.
I wait a minute, then the call resumes. I’m now speaking to the rep that originally fielded my call and what I can only assume is his supervisor. I’ll omit the greetings and get to business.
Supervisor: I understand you have questions about fund holdings. Although I’ve been briefed I’d like you to re-state your concerns.
Doom: I have significant holdings in VTSAX. This has become a problem for me as I’ve recently discovered that the total stock market index fund has holdings with major U.S. gun manufacturers. Does Vanguard have any guidance for investors who do not wish to invest in firms which produce firearms?
Supervisor: Have you checked out our socially responsible fund?
Doom: Yes. I’m surprised you’re not aware. Your so-called socially responsible fund has holdings in all of the companies I wish to divest from.
Supervisor: And what are those?
I repeat the ticker list.
Supervisor (after a pause): You are correct, VFTSX has holdings with those corporations.
Doom: So what’s Vanguard’s guidance for people like me that want to remain invested in Vanguard’s U.S. index funds but can’t tolerate the idea of profiting off of these companies? I’m sure you understand why I’m asking these questions. I believe in index investing, but I can no longer allow these companies to hold my dollars.
Supervisor (after another pause): You should check holding listings and invest in funds which don’t contain stocks you disapprove of.
Doom: Why doesn’t VFTSX divest from these companies?
Supervisor: I’m not sure off the top of my head.
Doom: What is the criteria the socially responsible fund must meet?
Supervisor: I can’t offer that information other than to quote the prospectus.
Doom: OK. So what I’m hearing is that Vanguard doesn’t have any real guidance here. No canned response, no ready alternatives.
Supervisor: Correct. I’m sorry I can’t help you further.
Doom: Fine. Please make a note of my concerns and escalate to anyone internally that might care, if you’re able. I’ll fix the problem on my own, as you suggested. Thanks for your help.
I’ve long since come to terms with the fact that investing in indexes means that I’m effectively rooting for a lot of rotten businesses to continue to increase profits at the cost of human misery and additional environmental damage. It’s not a great thing to live with, but there it is. Monsanto,
Philip Morris Altria, most big energy companies (which have been pumping money into climate change denial lobbies, despite absolutely knowing the science behind it.) The list goes on and on.
I will continue to live with this, mostly because I’m capable of just not thinking about these things very much. I’ve also come to terms with the idea that we’re all hypocrites. We lead lives that are not always in perfect harmony with our ideals – and some of those ideals and goals are, at times, in conflict. We’ve got to choose which ideals carry the greater weight.
I also don’t buy into arguments from fellow bloggers who attempt to rationalize profiting off of capital markets despite the damage the underlying companies are doing to the world. I simply cannot make myself feel all right about it. Instead, I mostly ignore it and do my best to manage the accompanying guilt.
The truth is I’m using these companies for a selfish end — to generate passive income so I don’t have to work anymore. It’s that simple. I am willing to live with some of the collateral damage.
This is America’s retirement plan after all: Compounded growth through investing in our corporations. Unless you think you can live off of flat government bond returns or the absurdly low social security payouts, you must have a percentage of your savings in publicly held companies in order to retire, and
many most of them do bad things. Pension plans have been gutted, employers are less and less loyal to their workforce as the years march on, you are likely to be a victim of ageism as you progress through your allotment of time of this planet — what options do you really have available anymore?
This is pretty much it, in my opinion.
But I must draw a line. I need to feel as though I’m doing something to combat this epidemic. There’s a breaking point for everyone, and this is it for me.
At this point you may say a few things. Like: Why guns? Why now? There are so many other awful businesses in the S&P500. Where does it end?
My response to that point would instead be that I’ve been more recently asking myself the opposite question: Where does it start?
Well, I’m starting here.
You might also say that I’m making a potentially costly emotional decision based on recent events, and investors should never make emotional decisions. We should always make the decisions which result in a maximum return, right?
And to this I’d reply I am making a rational decision. It’s based on the incredible number of shootings in this country. These are not recent events — these are on-going events. They are not anomalies. The United States of America is 10X over the firearm-death rate of other developed countries, and the trend lines show that things are getting steadily worse. I cannot to support these feckless, greedy asshats, even if it is indirectly, even if I lose future returns.
Note that I may reconsider this decision if these companies stop funding the NRA, stop lobbying congress to continue to make it easy for suspected terrorists to purchase firearms and oppose national gun registries or increased controls (e.g. background checks) around purchases at gun shows. They must admit that their behavior is part of the problem, and begin to take real corrective action.
Look, I’m also uncomfortably aware that retailers like Wal-Mart sell guns and ammo too, and I can’t exactly remove them and the like from my index fund portfolios. They’re enormous, they’re in the S&P 500, etc etc.
At the same time, I see that they have at least taken steps to stop selling semi-automatic weapons. They don’t donate to the NRA. And they don’t produce firearms themselves.
I know that what I’ve done is very little. It won’t bring back the people that have been lost. It won’t stop motivated humans from buying weapons and using them for what they’re for — to end lives. (That is, after all, what these goods have been designed to do.)
My actions do little to fix the systemic problems that result in the now regular massacres that occur in the States.
Despite this, I hold the belief that it’s better than doing nothing at all.
How do you personally resolve the moral conflict between your desire to build wealth and being indirectly tied to companies you don’t approve of?
06.22.2016 Update: I received a response from Vanguard via mail which further addresses their stance and wanted to share it.
Hooray for incredible customer service. I didn’t expect to hear anything back after our phone call from the week before.
Vanguard is deeply saddened by the tragedy in Orlando and can understand concerns about firearm safety and access. Many of our clients have voiced similar concerns. We engage in discussions with hundreds of our portfolio companies and relay the concerns of our shareholders.
However, we believe that mutual funds aren’t optimal agents to address social change. As a fiduciary, Vanguard is required to manage our funds in the best interests of shareholders and obligated to maximize returns in order to help shareholders meet their financial goals.
At the same time, we recognize that our clients would like to know their options. We offer more than 100 domestic mutual funds that have no direct holdings in firearm manufacturers such as Smith & Wesson and Sturm & Ruger.
Let us put our investments in another context. With $2 trillion in assets under management, our funds are the largest holder in many companies. We own at least a small stake in nearly every publicly traded company in the country. Most of the Sturm & Ruger holdings for example are in index funds, which are obligated to track their index. Smith & Wesson and Sturm & Ruger holdings represent less than half of one percent in most of the funds in which they are held.
If you have additional questions, please call us at … . You can reach us on business days from 8 a.m. to 10 p.m., Eastern time.
Vanguard Retail Investor Group
I responded with a warm thanks for taking the time to both outline Vanguard’s position again and re-state their workarounds for people who have hard and fast exclusion lists.
In the end, Vanguard’s position mirrors that of many of the folks in the comments section. This is, paraphrased: The purpose of index funds isn’t to question the underlying activities of the holding companies. If you want to enact social change, it might be best to consider other avenues.
These are good points, and I understood them prior to writing this blog post. They still do not change what I felt to be necessary action on my part.