Invest Skeptically

Ian McGugan writes, Confessions of an unethical investor, for Canadian Business Online and discloses his own “unethical” portfolio.

He writes: “It’s my experience that as long as a company operates within the law, intelligent people can debate its ethical stature from now until dividend day without reaching a conclusion [...] Ethical investing assumes that somebody — an ethical fund manager, or a certain group of thinkers — knows more than lawmakers and more than the rest of us about what constitutes morality.”

I fully agree. In fact, I’d say so-called ethical funds are just a marketing gimmick — and an expensive one at that. The iShares ETF that tracks the Jantzi Social Index (XEN) has a MER of 0.50%. Compare that to the ETF tracking the S&P/TSX 60 Index (XIU) with a MER of only 0.17%.

The top 10 holdings in XEN: the big 5 Canadian banks, Encana, Suncor Energy, BCE, Alcan, and RIM. The top 10 holdings in XIU: the big 5 Canadian banks, Manulife Financial, Encana, Suncor Energy, Canadian Natural Resources, Alcan. They look pretty similar, don’t they?

XEN holds 60 names, XIU has 61. They both have Financials, Energy, and Materials making up most of their holdings. While the underlying Jantzi Social Index has been around since January 2000, I don’t have access to a historical return series and haven’t performed any quantitative analysis. But here is my speculation for the future of XEN: high correlation to XIU with many rolling 36-month periods of under-performance.