Can You Make Your Investment Portfolio Reflect Your Values?

Can You Make Your Investment Portfolio Reflect Your Values?

The protests on college campuses are full of all kinds of demands, but many of them have one thing in common: money.

Many pro-Palestinian protesters want their school's foundations to withdraw funds from investments in companies with financial ties to Israel. Most institutions have rejected this.

This form of financial protest is not new. We all want to live our values ​​and want our universities, employers and communities to do the same. We saw similar protests in South Africa in the 1970s and 1980s and in the ongoing debate about climate change. Students in particular can learn a lot about investing, governance, and complexity by trying to influence their schools.

But many private investors also have the ability to single-handedly press the exclusion button on stocks they don't like. This week, I finally did it myself—after years of being annoyed by how a small number of companies have treated their American customers, employees, and the public trust at large. Since this is of a personal nature, I will not mention the names of the companies here. But to be clear, it had nothing to do with Israel and Gaza and everything to do with how I felt investing in bad corporate actors.

I'm not saying you should do that too. But if you want, it gets easier every year.

At first glance, the process may seem simple. If you don't want certain stocks in your portfolio, you don't have to buy them, or you can sell them if you already have them – and send a passionate message to the company's leadership team for good measure.

But many people invest in index funds – large baskets of stocks that make up the entire US stock market, for example. Until now, in most cases, it hasn't been possible to call a fund company and request that they withdraw or double certain stocks just for you.

However, that is changing. Using a strategy called direct indexing, you can perform your own subtraction within an index-like collection of assets. It is primarily available on brokerage accounts and not retirement accounts. However, this may change as the strategy becomes more popular.

A financial services company that performs direct indexing buys shares of a specific index on your behalf, and you own the shares directly, not through a mutual fund or exchange-traded fund. A big advantage of direct indexing is that you can save money on capital gains tax by buying and selling stocks at the right times to balance winners and losers. Another advantage is that companies allow you to keep certain stocks out of your portfolio, but you can still own any other stocks that are part of the index you want to track.

Direct indexing has been around for years, but the minimum amount a company must invest continues to decrease. Fidelity allows some people to do this with a minimum investment of $5,000. A startup called Frec needs $20,000. At Wealthfront, the service applies to accounts over $100,000.

Fees also apply and there may be limits on the number of companies you can exclude.

The financial services companies that offer direct indexing are companies that bring their own agenda. This lack of institutional advocacy – and the fact that most people cannot yet do direct indexing through a retirement portfolio in which many investors retain the majority of their stocks – will limit the social impact of this form of stock deselection for now.

However, we all have to live with ourselves. If just eliminating a few bad actors makes you feel better about your investments, then direct indexing may be worth it for that reason alone.

An additional feature of some offerings that is both strange and complicated is the ability to filter out industries or parts of them. This isn't just your standard get-me-out-of-oil-stocks feature.

Aperio, a direct indexing offering purchased by investment giant BlackRock for over $1 billion, offers protection for people who want to avoid investing in predatory lenders. How does it define these lenders? It turns the question over to a company called MSCI, which compiles data and indices of various kinds.

MSCI keeps an eye out for suspicious (but usually legal) lending practices, but none of the companies on its no-go list are a major bank, card company, credit bureau, student lender or mortgage lender. The six on the current list include companies in the rent-to-own and pawnshop categories.

“In theory, applying investment exclusions may sound simple, but in practice nuance is required,” Melanie Blanco, a spokeswoman for MSCI, said in an email. “Value-based exclusions require an understanding of the different ways a company can engage in a business activity.” In fact, so many companies in so many places make money from direct and indirect actions that it can be difficult to draw a red line.

By the way, none of the direct indexers I spoke to this week have heard of clients calling for a Gaza shield that would take away companies like the one that sought to take some protesters out of university endowments. However, that doesn't mean people don't remove individual companies from their stock baskets, even if the reasons for doing so aren't always clear.

Mo Al Adham, the founder and CEO of Frec, said he could not be sure whether the customers who removed Boeing from their holdings in recent months did so because of questions about the company's aircraft and their safety or because of Questions about their safety did work in Israel. They might also avoid Boeing because they worked there; Receiving your salary from the company is a big financial risk without also choosing to own the company's stock. Or it could be something else entirely.

But just because direct indexers haven't focused on the war in Gaza, unlike the biggest controversy of last year or next year, doesn't mean it can't be done. My screen happened to be about customer mistreatment. Yours may be about something even more idiosyncratic.

It takes all types of investors to create a market. The fact that it's becoming easier to make a name for yourself is good news for those who want to give it a try.