Ethical Fund

The political weapon of unsophisticated finance people throwing straw at brick houses everywhere. An ethical fund is one that has no…sin. Or no investments in, uh…what they perceive as bad things.

Porn. Tobacco. Guns. Gambling. Oil. Hollywood. And then there’s technology, which delivers all of the above. And let’s not forget about telecommunications, which lets people converse to then deliver all of the above.

Uh…going too far? Yeah. And that’s the problem with “ethical funds.” Healthy ethics are in the eyes of the beholder.

Go to a church service in the deep south, and it’s likely the congregation will give you a completely different “it’s okay to invest in” portfolio than would a bunch of hippies in Marin County, California.

So who is to say what is ethical and what is not?

Well, actually, it's the gang marketing the mutual fund (which named itself to be an ethical fund) that determines what investors would feel good about investing in. And hey, that's fine. Someday at Shmoop we want to start a fund investing only in companies that are funny.

The problem is that, for better or worse, a large portion of the names actively omitted from the list of buyable stocks in an ethical fund are often actually really good businesses. Oil and gas, for example, has been a stalwart for a century in the U.S. So has tobacco, and oh by the way, most technology companies’ early histories were driven by profits in and around porn.

So there is, in essence, a price that investors historically seem to be paying for the privilege of being all, um...judgy about what ethics are. Meaning that results in ethical funds tend to lag their competitors by a few percent each year, and over a couple of decades, that means that ethical funds end up being worth a lot less than unfiltered funds.

And then the big question gets asked from the ethically rich and financially poor…from the poor house…. “Shouldn’t the best ethics just revolve around legally producing the best financial return to investors?”