As we have discussed in previous issues, indexed Socially Responsible Investment (SRI) has better years and worse years. Since equity SRI indexes have existed, they have tended to be equal to or slightly better than their non-SRI benchmarks. As can be seen in the chart below, which compares the cumulative returns of our SRI index fund portfolios vs. that of the standard index funds at this point in time, after this first half of 2024 our Standard portfolios would generally be better off than the SRI ones.
In the following graph, we can see that, so far this year, the SRI alternative has clearly lagged behind the standard funds. This is due to differences in sector allocation and stock selection in the various benchmark indices. During this year, most of the rise in the U.S. stock market is explained by the strong performance of a few stocks, which are heavily weighted in the indexes (the so-called “Magnificent 7”). If, for some reason, there has not been as much exposure to these names, it is normal for the return to be lower.
Despite this, on average, SRI portfolios accumulated almost 4% so far this year, a reasonable return when compared to historical returns.
In the graph below, we observe that this behavior is replicated in the different types of portfolios. The portfolios are conceptually constructed in the same way, but each vehicle has certain limitations or characteristics that produce these differences.
The performance of long indexed SRI portfolios remains similar to that of their standard peers.
inbestMe was a pioneer in Spain and Europe in launching the first SRI indexed portfolios in 2018. Since then, we have often written about Indexed Socially Responsible Investment, aware that we are surely the financial institution in Spain that has the widest and most transversal offer of indexed SRI portfolios, both in ETFs (10 profiles), Indexed Funds (10 profiles) and Pension Plans (10 profiles).
As mentioned above, we see how, from 1/1/2017 to mid-2024, the average cumulative return of all SRI indexed portfolios (+38.0%) is slightly lower than the average return of the standard version (41.8%).
The inbestMe SRI indexed portfolios earn on average an annualized return (AER) of 4.0% or 0.6% less than the 4.6% of the standard indexed ones.
In summary, the performance of our SRI indexed portfolios is, over the long term, very similar on average to that of the standard portfolios, although different circumstances may arise from year to year, as we mentioned at the beginning.
Which should I select, an SRI or Standard indexed portfolio?
All this leads us to a recurring question our clients ask us: Which should I choose, an SRI or Standard indexed portfolio? Which is better?
On the one hand, the data suggest that socially responsible indexed investment can be as efficient as standard indexing, although from year to year we will find years favorable to one style or the other.
This first half of the year has been clearly unfavorable for SRI.
We have also seen that there are differences between profiles, and even more so if we go into our different portfolios, whether ETFs, Index Funds (the one we have focused on the most) or Pension Plans, which, although they are built with the same investment policy due to the conditioning factors of each vehicle, they are not totally identical.
It is difficult to say whether the good general performance of SRI observed in the analyzed period will continue in the future and when we are asked about it, we recommend to our clients that choosing SRI or not should correspond more to the pursuit of sustainability or social responsibility values than to the search for more profitability.
In other words, the answer is really up to each client, in any case, according to the evolution, it does not seem that the choice of SRI should be detrimental to results.
Let’s remember that the choice of an SRI indexed portfolio can be complementary in inbestMe thanks to the possibility of managing multiple accounts for a client. In other words, on inbestMe it is possible to combine (with the same or different profiles) a standard indexed portfolio with an SRI indexed portfolio (among other options), and an investor can therefore decide to dedicate only a part of his exposure to sustainability, thus broadening his diversification (in this case diversifying the investment style).
