Divesting from O&G (and coal)

[adiggs]

I decided to start up a new thread specific to divesting from O&G (and coal), to share what I've learned and to find out what others have learned. This is a take off from a conversation that has been on and off again in the Shorting Oil thread.


After minutes of research this morning, an option for passive investors that are otherwise following the S&P 500 (as I am in a 401k), is SPYX:
SPYX | ETF Portfolio Composition - Fidelity

(Dunno if this link requires a Fidelity login or not).

Anyway, this is an ETF that starts with the S&P 500 and subtracts out companies that own fossil fuel reserves (oil, gas, coal), but not companies that have metallurgical coal reserves (steel making).

It carries a .25% management fee that is being reduced to 0.20% presently (but can end at the end of this month, or the end of October in future years). I'm not a fan of paying .25%, but I also haven't found a lower cost passive fund that accomplishes the objective. (As a comparison, the S&P 500 index fund I'm in right now is a 0.02% management fee - much more to my liking).

I've looked at this in previous years, but due to rollover 401k rules (which I'll be learning more about), haven't had access to until this summer (too young, and not willing to quit my current job to get a 401k rollover). Now it's time for me to convert badly incomplete knowledge into actual knowledge, a plan, and do something


How have you gone about divesting in your life, and what did you find particularly helpful in accomplishing that objective?

How do you define divestment from fossil fuels? (For instance - do you also include the companies that provide O&G services to the fossil fuel companies?)


The one thing I don't like about the SPYX investment strategy is that it leaves the energy sector as a really small fraction of the investment. I see a generational / historical shift in the global energy system taking place, and I see that as a source of immense wealth creation (and destruction), so an investment strategy that gets out of energy almost completely doesn't sound like a good plan.

Then again, I have a lot of exposure to that energy system sea change through TSLA, and I haven't yet found a low cost passive index fund that does get access to the new energy system.

 

[neroden]

In this last bull market, since 2009, the oil & gas sector lagged behind the rest of the market by massive amounts -- I haven't looked it up recently, but it was many percentage points, far more than the 0.23% extra expense ratio you're paying.

My family was always invested primarily in individual stocks and bonds, so we, well, we sold our Exxon and Chevron and BP Amoco and Shell shares. We had a lot of them, held since the early 1950s.

We also managed to get out of an actual oil royalty/working interest which we held which we'd never really wanted because the paperwork was terrible, but we had not figured out how to sell for 30 years (weird history there). If you own actual oil royalties or working interests, the place to sell them is a website called Energynet. (We basically couldn't sell them until this website started existing.)

For funds which were in a retirement account where direct selection of stocks wasn't an option, we shifted some to fixed-income type investments (while shifting after-tax money which was in cash or fixed-income into stocks), converted some to IRAs where direct selection of stocks was an option, but we still have some stuck in fossil-exposed index funds.

This is probably not the most useful divestment advice for people who like mutual funds or intend to stick with mutual funds.

 

[adiggs]

Is SPYX an option?

Bringing @SebastianR 's question over from Shorting Oil.

It might be an option through something I have access to called BrokerageLink. It's a mechanism in my 401k for gaining access to the broader market, I think individual securities, and otherwise being able to be (more) fully self directed in the 401k. It's been awhile since I read my plan details - the last time I read about BrokerageLink, I remember concluding that the expenses were too high to pursue.

I've generally bought into the idea that most investors can get better returns through buy and hold, passive index funds, and a ruthless focus on lowering investing expenses. In my cases, that translates into a couple of individual companies that I own shares in directly (transaction fee to buy shares, no cost to own the shares, and a transaction fee to sell - using Fidelity so the transaction fees are small). And I transact shares REALLY infrequently (most years there are no sales to report on taxes).

For the index funds, that means I choose passive index tracking funds, and then focus on management fees.


I realize that there's a different conversation that can be had, about whether this is a good investing strategy. I know it isn't for everybody, but this gets me a personally desirable mix of low effort, and reasonable chance of doing better than baseline (where baseline are people that don't watch their transaction fees, change in and out of mutual funds chasing 'hot' managers, and/or trading in and out of individual companies).


It looks like SPYX is an option that I'll have available given that I rollover the 401k account to an IRA (for me, that means Fidelity). I just need to do the research around the rollover (which won't happen today, but I do plan to post what I learn, when I get it).


One of my purposes in starting this thread, is to see if anybody has found an investable mutual fund / ETF that they like better than SPYX, and why. Right now, that's my front runner as the alternative place for that 401k pool of money to live.

 

[durkie]

I decided to start up a new thread specific to divesting from O&G (and coal), to share what I've learned and to find out what others have learned. This is a take off from a conversation that has been on and off again in the Shorting Oil thread.


After minutes of research this morning, an option for passive investors that are otherwise following the S&P 500 (as I am in a 401k), is SPYX:
SPYX | ETF Portfolio Composition - Fidelity

(Dunno if this link requires a Fidelity login or not).

Anyway, this is an ETF that starts with the S&P 500 and subtracts out companies that own fossil fuel reserves (oil, gas, coal), but not companies that have metallurgical coal reserves (steel making).

It carries a .25% management fee that is being reduced to 0.20% presently (but can end at the end of this month, or the end of October in future years). I'm not a fan of paying .25%, but I also haven't found a lower cost passive fund that accomplishes the objective. (As a comparison, the S&P 500 index fund I'm in right now is a 0.02% management fee - much more to my liking).

I've looked at this in previous years, but due to rollover 401k rules (which I'll be learning more about), haven't had access to until this summer (too young, and not willing to quit my current job to get a 401k rollover). Now it's time for me to convert badly incomplete knowledge into actual knowledge, a plan, and do something


How have you gone about divesting in your life, and what did you find particularly helpful in accomplishing that objective?

How do you define divestment from fossil fuels? (For instance - do you also include the companies that provide O&G services to the fossil fuel companies?)


The one thing I don't like about the SPYX investment strategy is that it leaves the energy sector as a really small fraction of the investment. I see a generational / historical shift in the global energy system taking place, and I see that as a source of immense wealth creation (and destruction), so an investment strategy that gets out of energy almost completely doesn't sound like a good plan.

Then again, I have a lot of exposure to that energy system sea change through TSLA, and I haven't yet found a low cost passive index fund that does get access to the new energy system.

Yeah -- that's the problem with a lot of these specialty ETFs: SPXE is another SPY-minus-energy ETF and its expense ratio is 0.27%. And the TAN solar ETF, at 0.7%!

On a broader note, I am becoming much more wary of indices/ETFs in general though just because they've become the default "what do I do with my money?" answer for a lot of people. It makes me think of the George S. Patton quote: "If everyone is thinking alike, then somebody isn't thinking."

 

[adiggs]

I feel the same way.

AND I'm not willing to shrink my investment portfolio to the 2 companies I have a sufficiently high conviction about to own shares in directly.

So I use the passive indexes as a broad balance / dampening effect in the overall portfolio alongside of the conviction to own 2 companies as a significant fraction of total net worth.


Somewhat related - does anybody know of something like SPYX, but instead of the S&P 500 (big US companies), something equivalent for the globe? There's a good case to be made that economic growth over the remainder of the century is coming from Africa and Asia. The S&P 500 will be participating in that growth, but there will also be a lot of that growth happening in companies that aren't headquartered in the US. SPYX for a global 1000 sounds even better to me.


Regarding the expense levels, I think ~.25% is about my upper limit. I'd probably consider .5% if I couldn't find something lower, but SPYX exists and is close enough to what I'm looking for, that it establishes an effective upper limit on the expenses that I think I'll need to pay (so I'm paying .18-.23% to get out of the fossil fuel reserve companies - not thrilled, but less thrilled to have a 10% stake in companies I expect to be talking to bankruptcy lawyers in the next 5 years).

 

[Dr. J]

For the index funds, that means I choose passive index tracking funds, and then focus on management fees. <snip carriage returns> I realize that there's a different conversation that can be had, about whether this is a good investing strategy.

I would say this is a good investing tactic, but for strategy you need to take into account asset allocation, financial goals, etc.

On a broader note, I am becoming much more wary of indices/ETFs in general though just because they've become the default "what do I do with my money?" answer for a lot of people. It makes me think of the George S. Patton quote: "If everyone is thinking alike, then somebody isn't thinking."

ETFs are just a tool, like open end mutual funds and closed end mutual funds. Like those other tools, ETFs can be abused for sales and marketing purposes. If you keep an eye on what they invest in, how they're structured, and what they cost, they can be quite useful.

 

[Dr. J]

So I use the passive indexes as a broad balance / dampening effect in the overall portfolio alongside of the conviction to own 2 companies as a significant fraction of total net worth.


Somewhat related - does anybody know of something like SPYX, but instead of the S&P 500 (big US companies), something equivalent for the globe? There's a good case to be made that economic growth over the remainder of the century is coming from Africa and Asia. The S&P 500 will be participating in that growth, but there will also be a lot of that growth happening in companies that aren't headquartered in the US. SPYX for a global 1000 sounds even better to me.

I don't know anything about the original topic. In fact, in a previous life I made a ton of money in specific oil and gas stocks, including royalty trusts (a tax PITA, but much simpler and less risky than the working interest assets mentioned above).

But here is what I know:

• The S&P 500 Index is not equal to indexing, though most people and most salespeople think so. Almost any asset subclass is now available in an index configuration. Anything and everything is indexed.
• The S&P 500 is a capitalization-weighted index, meaning that the larger the stock's market capitalization, the bigger its weight. It consists primarily of large cap stocks, and is weighted even bigger than that.
• Even the Vanguard Total Market Index is (about) 70% weighted toward large caps, ~20% toward mid-caps, and (my guess) < 10% toward small caps. It's essentially a/(just another) large cap index.
• There are plenty of global indices which would be equivalent to the S&P 500 (Jack Bogle argues that the S&P 500 is all the foreign stock you need since many of its components are global companies). But large cap stocks in developed markets (EU, Britain, Japan) tend to move in tandem with large cap stocks in the US, making this kind of "diversification" less useful.
• To diversify a portfolio effectively, look at asset class returns AND correlations. Other large-cap stock indexes, even global ones, will not provide useful diversification.

 

[Dr. J]

I don't know anything about the original topic.

OK, Me, here is what I know. Given my investment goals, at the moment I don't think it's useful to eliminate oil and gas stocks from my portfolio because:

1. It looks difficult to accomplish, until some fund company comes up with the exact definition I have in mind of "oil and gas free."
2. It looks counterproductive, since my portfolio will be missing some element of the economy. Just because o&g is/may be a declining part of the economy, and just because o&g has/may have performed badly in the recent past (since 2008, e.g.), does not mean that will be repeated in future returns. Dying industries can provide above-market returns, if the market underestimates their NPV. Which it may.

I would as soon take my o&g investment profits and plow them into counter-strategies (environmental causes, renewable energy, etc.). Not pure, but practical.

About SPYX: "The index is designed to measure the performance of companies in the S&P 500 Index that do not own fossil fuel reserves." It's hilarious the following sentence is "The fund is non-diversified." It would be interesting to measure SPYX in Morningstar's X-Ray against SPY and see the degree of difference. Ergo (I'm guessing without looking), neither is SPY diversified.

Note that eliminating companies without fossil fuel reserves doesn't (I think) get at pure exploration plays, equipment providers, drilling/mining suppliers, material suppliers, etc.

 

[Dr. J]

@adiggs, a possibly useful resource:
Fossil Fuel Free ETFs That Aren't | ETF.com

 

[neroden]

I know it isn't for everybody, but this gets me a personally desirable mix of low effort, and reasonable chance of doing better than baseline (where baseline are people that don't watch their transaction fees, change in and out of mutual funds chasing 'hot' managers, and/or trading in and out of individual companies).

We can agree that that baseline is terrible, FWIW. I don't go for low effort because I study stocks obsessively for fun.

AND I'm not willing to shrink my investment portfolio to the 2 companies I have a sufficiently high conviction about to own shares in directly.

I believe my family currently holds positions in 7 names total, all of which I follow extremely closely. Plus substantial amounts of guaranteed annuities and T-bills. We're unusually comfortable with concentration, though. I don't think we've ever owned more than 15 different stocks at once.

not thrilled, but less thrilled to have a 10% stake in companies I expect to be talking to bankruptcy lawyers in the next 5 years).

That.

 

[adiggs]

Note that eliminating companies without fossil fuel reserves doesn't (I think) get at pure exploration plays, equipment providers, drilling/mining suppliers, material suppliers, etc.

Very true, and depending on what one is trying to accomplish, important to consider as well. I tend to think that the exploration companies will be early indicators of trouble coming, and that the material suppliers and well maintenance people will be laggards, in the energy transition I see coming. I'd expect the pipelines to keep doing well for longer (relative to the industry) because whether a company is in bankruptcy or not, continuing to produce resources is an important source of revenue to the shareholders either way, and those resources will have to be transported to market. (Similar thinking for the maintenance and materials suppliers - the closer a business is to supporting the production of already drilled for resources, the longer runway they have before the industry dries up around them).

And from the coal industry, we have evidence of just how long the runway for the industry can be.

The fossil fuel reserves measure is an approximation that covers the bulk of the trouble I want to avoid (each of us needs to think clearly about whether divesting is important to them, and exactly what they're trying to divest). But I'm also interested in considering funds that avoid companies that are primarily involved in oil services.


Each of us needs to do our own due diligence and be cognizant of the investing result we're trying to accomplish (don't do what I'm doing, just because I'm doing it). However, we can share what we learn and jointly make our individual due diligence / research easier.

 

[mspohr]

At last, divestment is hitting the fossil fuel industry where it hurts | Bill McKibben

 

[mspohr]

BlackRock lost $90bn investing in fossil fuel companies, report finds

BlackRock lost $90bn investing in fossil fuel companies, report finds

BlackRock, the world’s biggest investor, has lost an estimated $90bn over the last decade by ignoring the serious financial risk of investing in fossil fuel companies, according to economists.