JL Collins, VTSAX, FIRE & Impact Investing can they all get along?

A blog I highly recommend is JL Collins. A book I highly recommend is Jim’s book A Simple Path to Wealth. Both are tremendous resources for building wealth and savings. I follow Jim’s methodology which is to save as much as possible and invest it into low cost index funds. The key is not to waiver, stay focused and keep investing even when the market tanks. The beauty of Jim’s message is its simplicity and as such its become a favorite among the Financial Independence Retire Early (FIRE) community.

The backbone of Jim’s philosophy is index investing through Vanguard and the fund he focuses most attention on is VTSAX, their total stock market index fund with a super low .04 expense ratio (ER).

The challenge for me is VTSAX and other funds like it are index funds of the top companies in the United States. For example, VTSAX holds over 3,500 companies, as an impact investor some of those I don’t want to invest in. Among those companies are more than 150 in the oil/gas industry, 13 in the coal industry, 5 manufacturers of civilian firearms, 16 manufacturers of nuclear armaments and 31 major military contractors according to screening tools outlined in my first post.

Simply put I don’t want my investments supporting any of those areas. In reality, completely divesting from all areas you personally deem problematic and still having a relatively simple investment strategy is a challenge and may not be possible. The good news is with minimal effort you can significantly reduce or eliminate exposure to some problematic areas and keep costs lows, sticking to the approach outlined on JL Collins.

VFTAX the Impact Investing ESG Alternative to VTSAX

My core holding is Vanguard’s FTSE Social Index Fund (VFTAX). VFTAX, like VSTAX is an index fund that holds US-based companies and has a low ER of .14. VFTAX has almost 500 companies in its fund and tracks an index modified for certain environmental, social and governance criteria. Looking at its stocks, VFTAX has 25 holdings in the oil/gas industry, none in coal, zero gun manufacturers and 1 major military contractor. Is it perfect? No. But it is a hell of a lot better than VTSAX in areas I care about and it allows me to do all the things that are key to following JL Collins like: high savings, automatic investing and low costs.

Supplements

VTFAX is my core holding. Of all the impact investing ESG mutual fund options out there, this fund has the lowest costs and best balance. I intend to supplement VFTAX with either another fund to pick up some international exposure and/or some ETFs in areas I am personally interested to invest in. Those endeavors will be the focus of future posts.

Vanguard vs. Schwab

As I said in my intro post, I have accounts at both Vanguard and Charles Schwab each has benefits and weaknesses here is my two cents.

Vanguard

Without question Vanguard is the leader in low cost mutual funds both index and actively managed. Vanguard also allows commission free trading of a wide range of ETFs both their own and also from many other firms (1,800 ETFs and counting).

Vanguard’s automatic investing settings are the best I’ve used. They allow for automatic deposits and investments any day of the week, whereas Schwab allows for automatic deposits any day of the week into your account, but only allows for automatic buys on the 5th or 20th of the month – a major limitation in my mind if your setting up automatic withdrawals that coincide with your pay check for instance.

Access to independent research is non existent at Vanguard which is a limitation for sure. Vanguard does not offer the option to have checks or a credit/debit card linked to your account. Customer service at Vanguard is also not their strength, unless you are a high dollar customer your pretty much on your own.

ESG Impact Investing Options

Vanguard currently has 2 ESG mutual funds and 2 ETFs in their own line up. I own one of them, VFTAX, their other mutual fund is a new ESG world fund, managed by Wellington. There is also access to a number of impact investing suitable ESG ETFs through their commission free list which currently has over 1,800 ETFs.

Charles Schwab

Endless options await you in your Schwab account, its a bit overwhelming actually. Customer Service at Schwab is amazing. I use their chat customer service all the time it is incredibly helpful. You have access to a wide portfolio of mutual funds and ETFs many of which trade for no commission if they are part of the Schwab One Source or other lists. If a fund you are interested in is not on the list, the trading commission is steep.

Schwab has an excellent Visa debit card you can link to your individual investor high yield checking account. The card is amazing it refunds ATM transaction charges anywhere in the world and also has no foreign transaction fee. The card is considered one of the best cards for travel, many open Schwab accounts just to get the card. I’ve recommended the card to numerous people.

Moving money around accounts is super easy. Schwab also has a relationship with American Express and offers two Schwab American Express cards that both have great benefits and signon bonuses that deposit into your account. I use the Schwab Investor Amex card which has a $200 signon bonus and 1.5X cash back into your Schwab account on all purchases.

ESG Impact Investing Options

Schwab produces a lengthy list quarterly of socially conscious ESG mutual funds and ETFs that trade with no commission.

If you find this information useful and signup for a Schwab account please consider using my referral link.

Mutual Funds vs ETFs

Understanding the differences between mutual funds and ETFs is important. Both can be quite useful but operate differently in terms of how they are traded. Mutual funds are what most of us have in our work retirement accounts. They are a collection of individual stocks organized into a mutual fund following two primary methods. Actively managed and passively managed. Actively managed funds are created and maintained by a team of investment professionals following the objective(s) of the mutual fund. Because these types of funds have people working on them the costs are higher.

Passively managed funds follow an index and their investments and % of allocations mirror whatever index they are following. Since there is less human interaction the expense ratios tend to be significantly lower.

Perpetual by Philippa Jones at the Confederation Centre of the Arts

Mutual funds settle daily, meaning at the end of each trading day all buy/sell orders are processed regardless of what time of day you placed the order. Another key feature of mutual funds is the ability to buy partial shares. This makes mutual funds the ideal choice for automatic investing, you determine the amount and then an order is made for that amount regardless of the price per share at the end of the day. Its an easy way to accumulate funds in a Roth IRA or work retirement account. On the whole there are fewer ESG type mutual funds that will appeal to impact investors.

Mutual Funds are great for:

  • Automatic investing – can buy partial shares
  • Simplification of portfolio and management
  • Not subject to intra-day volatility
  • Access to actively managed funds run by experienced professionals

Exchange traded funds (ETFs) are similar to mutual funds, except they trade like stocks and can be bought and sold throughout the day. Generally speaking ETFs have lower expense ratios than mutual funds. There is another sub group of funds that are relevant to our interests in impact investing. These funds mirror and index but then exclude certain companies that don’t fit a desired criteria. A good example is SPYX, SPDR’s S&P 500 fund that excludes holdings in fossil fuel reserves.

Exchange Traded Funds (ETFs) are great for:

  • Highly flexible, can trade throughout the day
  • Tremendous diversity and niche investing
  • Many socially conscious ESG ETFs to choose from
  • Low minimum investment amount, allows you to start investing quicker

Hopefully this post was useful in identifying some of the key benefits of each type of investment. In future posts I will look at specific options that appeal to me as an impact investor. I own both mutual funds and ETFs in my investments. Determining which is better for you is an individual choice based on the level of engagement you want to have with your investments.