May 8, 2018
The recent surge in environmental and social investing has provoked commentary from a variety of financial experts. While there are those who question the impact of such investing schemes, others support the efforts of large institutional investors to be more socially conscious. But what about the people who are actually trusting these institutional investors with their nest eggs? Are they selecting passive investment vehicles in order to dictate companies’ social and environmental policies or is this out of step with their views on what passive investors should be doing?
We surveyed 1,000 investors with assets in exchange traded funds (ETFs) to find out.
Turns out, a full 78% of them invest in passive funds because they want low fees and consistent returns and are not, by and large, motivated by social or political causes. More specifically, 29% select and ETF provider due to their low fees, 29% based on the prospect of stable and consistent returns, 22% due to ETF’s ability to diversify their investments and reduce risk, and 9% because of tax advantages. Conversely, only 11% select ETFs due the expectation the funds will use their size to influence companies’ behavior or the expectation the funds will invest in worthy political/ social causes.
Or, in the words of one of the surveyed investors:
“I don’t invest in ETF to influence company behavior or to invest in worthy political/social causes. My choice is based on the benefits to my accounts.”
The disparity between what the actual investors want and how some large institutional investors are using their funds is potentially problematic, especially in light of the fact that these passively managed funds now hold $4 trillion in assets and account for 34 percent of the entire U.S. mutual fund market.
This problem is far from niche, in fact the rise in activist investing has contributed to a rapid decline in the number of American publicly traded companies over the last 20 years, as new companies see restrictions on their ability to operate and instead seek funding from private sources. This means that when main street investors are looking for investment opportunities they are selecting from a smaller pool of businesses and perhaps missing their chance to back the brightest and most innovative new ideas.
This alarming trend is one of the many reasons the Mainstreet Investors Coalition demands that fund managers focus on maximizing performance—not playing politics with other people’s money.
For more on our survey check out our factsheet.