One’s Vice Is Another’s Virtue

Comments on “Identifying and Screening for Vice and Virtue Stocks,” by Charles Rotblut, CFA, in the September 2018 AAII Journal:

The problem for many investors is how to identify and avoid evil companies. Like vice, evil may be in the eye of the beholder. Examples might include Monsanto and Bayer, Johnson & Johnson, Wells Fargo, etc.—that is, companies that destroy the environment, attempt to purposely evade the law and financially or physically damage people. Is there a website that keeps score on business malfeasance?
—Kendrick Miller from North Carolina

I would also be interested in a list of “evil” companies. All those who avoid “evil” essentially make “evil” companies a bargain and “good” companies overpriced. Virtue is costly to the virtuous in dollars because the holier than thou get paid in good feelings and bragging rights, while the owner of “evil” companies gets to discreetly take it to the bank.
—John Lambert from New Jersey

Charles Rotblut responds:

One gauge would be to look at what’s held in vice funds and to look at ESG (environmental, social and governance) ratings. It’s not perfect, however, because the definitions are subjective. What one person may want to avoid, another person may be comfortable holding in their portfolio. For example, a smoker may view casinos as dirty money while an avid hunter may want to avoid companies labeled as polluters.

Investing in ETFs vs. Mutual Funds

Comments on “How ETF Shares Are Created, Redeemed and Traded,” by AAII Staff, in the September 2018 AAII Journal:

As an investor who is looking to buy mostly index funds to be held for the long run, I am trying to understand if one is better off investing in exchange-traded funds (ETFs) or mutual funds and I still do not have an answer.
—Jim Wood from South Carolina

Charles Rotblut responds:

There isn’t a single universal answer. ETFs are generally better for taxable accounts. Mutual funds allow you to invest the full amount because you can buy partial shares, whereas with ETFs, you could be left with some odd dollar amount uninvested.

You should also consider costs. Fidelity has no-expense-ratio index mutual funds (they’re new and I don’t know much about them). Vanguard’s Admiral share class has the same expense ratio as its ETFs for, say, the S&P 500 index funds. Depending on where your account is, you may or may not incur commissions.

I would do what you feel most comfortable with, while considering the fees and costs you may incur. With traditional index funds, the difference between ETFs and mutual funds isn’t generally very big, though you should still look closely at what you’re buying before doing so.

Evaluating Advisers

Comments on “Advice on Evaluating an Adviser From an Industry Veteran,” by William Francavilla, CFP, in the September 2018 AAII Journal:

I think that the most important question to ask a financial adviser is, “Are you a fiduciary?”
—L. Northrop from California

I have generally felt that advisers who are compensated by “fee only” are more likely to provide useful advice than those who have something to sell, like stocks or annuities.
—Brian from Pennsylvania

Comparative Performance

Comments on “Do the Top ETFs Continue to Outperform?” by Charles Rotblut, CFA, in the September 2018 AAII Journal:

I don’t know anyone who picks the top funds, independent of category, based on performance. On the other hand, I do know quite a few people who choose an ETF and/or mutual fund based on past performance relative to other funds in their category: for example, choosing First Trust Emerging Markets Small Cap AlphaDEX (FEMS) for emerging market exposure (in spite of high expense ratios) over other emerging market ETFs based on past five-year performance. It would have been nice to see more data addressing this.
—C. Carter from California

Staying Sharp

Comments on “Seven Steps to Protect Against Cognitive Aging” from Briefly Noted in the September 2018 AAII Journal:

In a nutshell, preparation and delegation are essential for even the most acute mind.
—Wm F. Fusco from Connecticut