FITLX: Is ESG a Good Investment?

The Fidelity U.S. Sustainability Index Fund (FITLX) is a relatively young mutual fund investing in U.S. companies with strong environmental, social, and governance (ESG) performance. The annualized return of 15.26% can surely grab attention, but first:

What is ESG?

ESG stands for Environmental, Social, and Governance, three key areas used to evaluate companies’ ethical and sustainable practices:

• Environmental: How a company manages its environmental impact, from reducing carbon emissions to using renewable energy.
• Social: Focuses on how companies treat their employees, customers, and communities, such as labor rights and diversity.
• Governance: Looks at a company’s leadership, transparency, and adherence to ethical business practices.

Is ESG “Woke”?

Critics of ESG investing often label it as “woke,” implying that it prioritizes political or social agendas over shareholder value. However, ESG proponents argue that sustainable business practices reduce risks, enhance long-term profitability, and align with growing consumer and regulatory demands for corporate responsibility.

How Does FITLX Perform?

While some may think ESG is just a result of “wokeness” ideology, the chart seems to support proponents’ claims that companies with strong ESG scores perform better. Despite its short history, FITLX has already outperformed the S&P 500 by an impressive 43% since 2017:

However, I would argue this is largely due to the higher weighting of big tech companies like Google and Microsoft (often criticized for being “too woke”). If you test FITLX against QQQ, which tracks the Nasdaq 100, you’ll find that QQQ outperforms the ESG filter by a wide margin, simply focusing on big tech:

I didn’t find any compelling data showing that a high ESG score directly influences better results. If there is any correlation, the most obvious explanation is that big, successful companies face more pressure to adhere to ESG principles.

Conscious Investing

If we look for a good justification for funds like FITLX to exist, growing investor preference seems to be a better one. Several studies indicate that investors are increasingly inclined to invest in companies that align with their personal values:

• Ipsos’ Study on Consumer Preferences found that across 25 countries, an average of 70% of respondents prefer to buy from brands that reflect their own principles, highlighting the importance of environmental, social, and governance (ESG) factors in consumer brand preferences.¹

• Morgan Stanley’s “Sustainable Signals” Report observed that individual investors are increasingly considering sustainability issues in their investment decisions, including screening investments for alignment with their personal values and interests.²

• EY’s Analysis on Millennial Investors (2017) noted that millennials, poised to inherit significant wealth, prefer to invest in alignment with their personal values, suggesting a growing demand for sustainable investments.³

If this is the reason you buy FITLX, you may still want to look into some community comments.

What the Community Says

As always, I dived into popular investing forums, and here’s what investors are saying:

1. Low Expense Ratio and Sustainability Appeal: FITLX’s 0.11% expense ratio makes it cost-competitive among ESG funds. Many investors like its focus on socially responsible investing, seeing it as a good alternative to traditional total market funds for those prioritizing environmental, social, and governance (ESG) principles.

2. Skepticism About ESG Funds: Several contributors criticize ESG offerings for inconsistency, pointing out that some included companies, like Coca-Cola, don’t align with sustainability ideals. Others view ESG funds as little more than S&P 500 proxies with limited differentiation.

3. Performance Concerns: Critics argue that ESG investments often underperform compared to broader market funds like FXAIX, noting that prioritizing values over returns might come with trade-offs.

4. Impact Debate: Some question whether ESG investments actually drive positive change. They suggest that unless tied to IPOs or private equity, investing in these funds doesn’t materially support the underlying causes.

5. Alternative Preferences: While FITLX has its advocates, many suggest looking into Vanguard’s VFTAX for ESG investing or pairing FITLX with a broader international fund like FSPSX for better diversification. Read: FITLX vs. FZROX

Verdict: A Polarizing Pick

The community remains divided—FITLX appeals to values-driven investors but is met with skepticism regarding impact and returns. If you’re looking for an ESG fund, it’s worth exploring its holdings and weighing them against your broader investment goals.

Conclusion

Personally, I find FITLX to be a bit of a paradox. On the surface, the idea of an ESG filter is intriguing, but I struggle to find compelling economic arguments to fully support it. The criteria for high ESG scores also leave me with some doubts about their consistency and transparency. That said, despite its somewhat messy approach, FITLX offers a broad mix of companies and has performed well so far. It’s worth considering if you align with its principles, but proceed with an understanding of its limits.

FAQ

Q: Is FITLX a good investment?

FITLX, the Fidelity U.S. Sustainability Index Fund, aims to provide investment results that correspond to the total return of the MSCI USA ESG Index. It focuses on large- to mid-cap U.S. companies with high environmental, social, and governance (ESG) performance. As of October 31, 2024, the fund has total net assets of $4.195 billion and an expense ratio of 0.11%. Its performance has been competitive within its category, capturing 107% of the category average’s upside and 105% of its downside from inception through March 2024. However, as with any investment, it’s essential to assess how it aligns with your financial goals and risk tolerance.

Q: What does FITLX invest in?

FITLX invests in securities included in the MSCI USA ESG Index, representing large- to mid-cap U.S. companies with high ESG performance relative to their sector peers. As of September 30, 2024, the top holdings include Microsoft Corp. (10.15%), NVIDIA Corp. (10.02%), Alphabet Inc. Class A (3.29%), Alphabet Inc. Class C (2.91%), and Tesla Inc. (2.60%). The fund’s sector allocation is predominantly in Information Technology (31.31%).

Q: Does FITLX pay dividends?

Yes, FITLX pays dividends. The most recent income dividend was $0.24, distributed in 2023. Dividends are typically paid annually.

Q: What is the FITLX stock forecast?

As an index fund, FITLX aims to mirror the performance of the MSCI USA ESG Index. Therefore, its future performance is closely tied to the performance of large- to mid-cap U.S. companies with high ESG ratings. Predicting exact future performance is challenging and depends on various market factors. Investors should consider their investment horizon and risk tolerance.

Q: What is the turnover rate of FITLX?

As of the latest available data, FITLX has a turnover rate of 21%. This indicates that 21% of the fund’s holdings are replaced annually, reflecting a relatively low turnover rate typical of index funds.

Q: What is the expense ratio for FITLX?

FITLX has a net expense ratio of 0.11%, as stated in the prospectus dated December 30, 2023. This low expense ratio makes it a cost-effective option for investors seeking exposure to ESG-focused U.S. companies.

Q: What is the fee for FITLX?

FITLX does not have any front-end or deferred sales loads. The primary cost to investors is the expense ratio, which is 0.11% as per the latest prospectus. There are no additional fees such as 12b-1 fees or redemption fees associated with this fund.

Footnotes

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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Investing involves risks, including the possible loss of principal. Always conduct your own research before making investment decisions.