Never put all your eggs in one basket – this also applies to the stock market. For long-term investors, diversification is therefore one of the most important rules of all. And the diversity on offer is easy to implement with ETFs.

ETF stands for exchange traded fund. Investing in this way means buying a share in a basket of securities. The basket is put together in such a way that it tracks a specific index as closely as possible – for example, the Swiss Market Index (SMI). If the Swiss stock market performs positively, the value of the ETF also increases.

Generally, any index can serve as the basis for an ETF – plus indices that are created specifically for this purpose. There’s a large choice: around 1,600 different ETFs are traded on the Swiss stock exchange alone. Investors for whom environmentally friendly action, social responsibility and conscientious management are important will also find products with a sustainable focus.

Wide range of sustainable ETFs

Many sustainable ETFs have a geographical focus: there are products based on global indices that include the world’s most sustainable companies. Others only allow sustainable companies from certain regions such as the EU or the large emerging markets; and certain ETFs focus on a single country – for example, sustainable companies from Switzerland, the US or China.

Other ETFs don’t cover the entire range of ecological, economic and socially sustainable investments, but only individual aspects of them: for example, companies with a particularly low carbon footprint, particularly high level of social responsibility or distinct gender equality. There are also specialized ETFs that limit themselves to a certain sector (e.g. energy) or even only a certain technology (e.g. solar).

Five advantages of sustainable ETFs

Green ETFs are becoming increasingly popular with investors – and for good reason. The following advantages speak in favour of these sustainable investment products:

Performance

Anyone who believes that sustainability necessarily comes at the expense of returns is mistaken. In the past, sustainable ETFs performed at least as well as those without a focus on sustainability.

Low costs

ETFs don’t try to outperform the index, but rather they replicate it. This means that they can function without a manager monitoring their performance, and are usually passively managed. As a result, their costs are usually lower than actively managed funds. However, it is true that sustainable ETFs are usually somewhat more expensive than funds without a sustainability label.

High degree of transparency

ETFs are traded on the stock exchange. Their prices are available at any time, and their composition is also published regularly.

Great flexibility

Sustainable ETFs can be bought or sold at any time on the stock exchange during trading hours.

Diversification

Investors invest in a basket of securities. As a rule, the basket has a high degree of diversification. But be careful: this only applies to a limited extent for specialized ETFs that focus on one sector or technology, for instance.

Investors must pay attention to the following

As with all financial investments, sustainable ETFs also bear market risk: losses are therefore possible at any time. Investors should not take risks that are not in line with their long-term investment strategy or their financial possibilities.

Selection of securities

The specific challenge of sustainable ETFs is their composition. Investors who value sustainability must pay attention to the securities in which an ETF invests. This is because the issuers of sustainable ETFs decide themselves which companies they include in the investment universe. And definitions of what counts as a sustainable company sometimes diverge significantly.

An example is the Euro Stoxx 50 ESG Index that carries out negative screening. Industries such as tobacco, controversial weapons or coal power are excluded. Furthermore, certain companies with poor sustainability scores are removed from the index. Despite the exclusion principle, companies like Ryanair, Total and Eni remain in the ESG index because they function more sustainably than other companies in their industry. This means that investors may also invest in airlines and oil companies through a sustainable ETF.

Lack of standards

The situation is made more difficult by the fact that there is a lack of globally binding sustainability standards. There are laws in several countries that require companies to provide information about their sustainability efforts. But how they do this and which aspects they take into account varies from country to country and from company to company. Rating agencies that assess companies’ sustainability also use different criteria and weightings. This is why they are hardly comparable with each other.

Specialized products

With very specialized products, for example ETFs that exclusively cover e-mobility, there is less risk of doing a blind bargain. However, the focus on one theme limits diversification. This often makes the investment riskier. In addition, the costs for specialized sustainable ETFs are usually significantly higher than the costs for sustainable ETFs based on standard indices.

Past price performance is not an indication or guarantee of the future performance of the investment assets.