Do your civic duty on Election Day and vote, go to church on Sundays, but always bring a cool unemotional detachment to investing on Mondays.
That is a favorite theme of mine, one I hammer on in these pages all the time. It is why it is so important to separate your emotions from your investment portfolio. That was the reasoning behind a column I wrote last year questioning whether people should buy an exchange-traded fund based on biblical values. I have no problem with people wanting to feel good about their investments, but I also want them to realize what their choices potentially do to their returns.
Today, I want to see how well the Inspire Global Hope Large Cap ETF, with the ticker symbol BLES, has done in terms of returns and otherwise.
First, the benchmark: Finding a suitable one isn’t easy, as the fund’s holding are made up of 50 percent U.S.-based securities, 40 percent in developed-nation foreign securities and 10 percent in emerging markets. It invests in companies with market capitalizations of $5 billion or more. The closest comparable indexes are either the BlackRock Inc.’s iShares MSCI World ETF or perhaps State Street Corp.’s SPDR S&P 500 ETF Trust.
The fund lags both indexes in terms of returns at three months, six months, one year and since inception on Feb. 28, 2017.
The cost of the Inspire fund is another factor, at 0.61 percent, which is more than twice as much as the BlackRock product, which is 0.24 percent, and it is more than half a percentage point higher than the State Street product, at 9.5 basis points. That’s a pretty substantial drag on returns over a longer period of time.
My investment philosophy is that most of your portfolio should be in low-cost indexes. You should feel free to have some of your portfolio in non-indexes, but only if you can come up with a sound reason why you are moving a few percent away from what looks like a sure thing into something that might or might not be a better substitute. My preferences have been toward the Fama-French factor model focused on value, size and quality. If you want to deviate from that, well you should have a defendable reason.
Feel free to use 5 percent of your portfolio for your mad money, i.e., speculative or themed investments. But the bar for moving away from beta, or market-matching returns, in your pursuit of either above-market alpha or other factors is very high. Things get complicated when the portfolio shift is based on issues other than performance — ethics, politics, sustainable investing, corporate governance and social motivations. These all come with compromises.
One such non-financially motivated portfolio I noticed recently is named the Point Bridge GOP Stock Tracker ETF. Its clever stock symbol is what caught my eye: MAGA. GOP Stock Tracker’s slogan is “invest politically,” a strategy many will tell you is counterproductive. As Bloomberg News reported, this ETF only invests in companies that are loyal to President Donald Trump and the Republican Party:
Not necessarily the most profitable companies, or the fastest-growing, or the ones with the most attractive price-earnings ratios—or any of a number of metrics a typical investor would use. Instead, it selects companies based on public information about donations to Republican candidates by their employees and political action committees.
To me, this is a very strange basis for making an investment — it might satisfy an emotional need, but not a financial one. In fact, as we showed earlier this year, the companies that Trump trashed did much better than the ones he liked.
The knee-jerk response will be, What about environmental, social and governance investment products. The short answer is that the first and third parts of ESG, environmental and governance, have a correlation with better performance. The underlying basis of environmental investing is that companies with less exposure to environmental volatility and associated costs tend do better; on governance, diverse leadership is associated with less groupthink and better decision-making. No such correlation has been shown for social investing; similarly, an inverse correlation seems to exist for political investing.
If you want to invest from a political angle, the closest thing I have found to a rational basis is the Life + Liberty Emerging Markets Index, which says it incorporates “human and economic freedom metrics as primary factors in our investment selection process.” The idea behind the Life + Liberty index, which will introduce an ETF in 2019, is that “freer” markets experience more sustainable growth, and attract, retain and allocate capital more efficiently than countries with unfree.
Politics and religion are both unavoidably emotional. That is why they tend to be bad for your investment returns. If you are worried about your mortal soul, try to be a nicer person, and pick up karma points wherever you can — preferably not when making investment decisions.
— For more Bloomberg Opinion columns, visit http://bloomberg.com/opinion.
Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”