Whether you’re a new investor or an experienced one, ETFs can be a good way to build a share portfolio. Plus, plenty of ETFs listed on the ASX have an ethical or sustainable theme, meaning they can be a great way to build an ethical share portfolio, too.

The information in this blog is general in nature only and based on SIX's internal research. We haven’t taken any individual person’s needs or objectives into account when preparing this information. Any mention of a company is not a recommendation to buy or sell. As always, do your own research or seek personal financial advice before making any investments or financial decisions.

ETF stands for Exchange Traded Fund. Rather than buying shares in an individual company, you can buy shares in an ETF. This allows you to invest in a fund with multiple companies in it with just one trade. ETFs are a low cost way to own a piece of lots of companies, and it lowers your risk by spreading your investment across these companies.

It’s usually pretty obvious from the name of the ETF what they are invested in. As an example, the Betashares Australia 200 ETF (ASX: A200) invests in the largest 200 companies on the ASX, and the Vanguard Australian Property Securities Index ETF (ASX: VAP) invests in the largest property companies on the ASX.  

Each ETF has rules about what companies it invests in and how much of each company to buy. For example, the A200 ETF’s rules say the ETF invests in the largest 200 companies listed on the ASX, and owns each of the companies in proportion to their size. The Commonwealth Bank (ASX: CBA) is so big that it makes up about 10% of the value of all shares in the ASX200, therefore it also makes up about 10% of the holdings in the A200 ETF.

What’s an ethical ETF?

An ethical ETF is one where the rules for the ETF include ethical or sustainability criteria. Usually these are rules about the types of companies the ETF can’t invest in, like tobacco or gambling companies. This is called ‘negative screening’. 

Sometimes ethical ETFs also include ‘positive screening’, which are rules about positive activities the ETF should invest in, like renewable energy or healthcare companies.

ETFs are a popular way for people to invest in international shares. Rather than having to convert your money into different currencies and invest through overseas stock markets, ETFs allow you to invest in global companies through a single trade on the ASX.

The Betashares Global Sustainability Leaders ETF (ASX: ETHI) is not just the biggest ethical ETF, but it’s also one of the 20 largest ETFs on the ASX. ETHI invests in 200 global companies and has a very wide list of ethical exclusions. This means it’s the least likely of the 3 featured ETFs below to invest in a company that does an activity you don’t like. The ETHI ETF also has some positive screening which favours companies which have better climate performance than other companies in the same industry.

The iShares Core MSCI World ex Australia ESG ETF (ASX: IWLD) has a larger portfolio than ETHI, giving exposure to 694 global companies. However, it also has the fewest ethical screens out of all 3 featured ETFs. These negative screens mostly cover the basics like weapons, tobacco and fossil fuel mining.

The Vanguard Ethical Conscious International Shares ETF (ASX: VESG) has the largest portfolio, investing in 1,526 companies. It has a few more ethical screens than IWLD, including alcohol and gambling, but not as many ethical screens as ETHI.

A larger number of companies in a portfolio can be good from a diversification perspective, but it also increases the chances that some of those companies may not meet your ethical values.

You can read our ethical profiles on each of these ETFs on the SIX app: ETHI, IWLD, VESG

Comparing the largest Ethical International Share ETFs

If you’re unsure about which Australian companies to buy, you may find it convenient to invest in an ethical ETF that invests in Australian shares.

Betashares, once again, has by far the biggest Australian ethical shares ETF. The Betashares Australian Sustainability Leaders ETF (ASX: FAIR) is almost three times bigger than the next most popular Australian ethical shares ETF. FAIR has both a wide range of negative and positive screens to select the companies it invests in. Having a wider amount of exclusions also means it has fewer companies it can invest in. FAIR invests in 81 companies, while an ETF like the Vanguard Ethically Conscious Australian Shares ETF (ASX: VETH) – that has fewer negative screens – contains 241 companies.

Like FAIR, the Russell Australian Responsible Investment ETF (ASX: RARI) also has both negative and positive screens, and a similar portfolio size at 83 companies. However, it’s worth noting that some of the thresholds applied to its negative screens can be a bit high. For example, while RARI excludes fossil fuels, it still allows companies that earn up to 10% of their revenues from oil and gas.

You can read our ethical profiles on each of these ETFs on the SIX app: FAIR, VETH, RARI

‍Comparing the largest Ethical Australian Share ETFs

Most ETFs are known as ‘passive’ investments, because they follow rules to decide what companies are included in the ETF, rather than having a person decide. ETFs that follow rules tend to have lower fees because you don’t need to pay for expensive investment people to pick the stocks.

However, the ETFs below are a bit different: they are managed by an investment manager who actively picks the companies. This means you get a professional investment manager picking the companies the ETF invests in, but this comes with higher fees and investments in fewer companies.

The Intelligent Investor Ethical Share Fund (ASX: INES) is managed by InvestSmart and invests in 10-40 Australian and global companies. It uses negative and positive screening in its selection. It’s technically a managed fund instead of an ETF, which means it’s not as transparent as an ETF (they only publish their top 10 holdings, rather than their full portfolio).

The Perennial Better Futures Fund (ASX: IMPQ) is managed by Perennial Partners and invests in about 45 small- and medium-sized companies listed on the ASX that fit their ethical themes. The Australian Ethical High Conviction Fund (CBOE: AEAE) is managed by one of Australia’s leading ethical fund managers, Australian Ethical Investment, and invests in 30-35 companies listed on the ASX. While the ETF is only a few years old, Australian Ethical Investment has a long track record in ethical investing as one of the first ethical investment managers, founded in 1986.

You can read our ethical profile on IMPQ on the SIX app, with INES and AEAE coming very soon!

Comparing actively-managed Ethical ETFs