Fund Focus: Do No Harm?

This week, Jeff explores whether Vanguard's announced ESG ETFs will truly do no harm, and Jim covers a fund in the business of moving people. [Fund Focus Weekly - Winning Strategies for Mutual Funds Investors] [Fund Focus Weekly]( In This Issue [arrow] [This Week's Fund Focus](#L1) [arrow] [Vanguard Market Flash](#L2) [arrow] [Fidelity Fund Review: Select Air Transportation](#L3) Jun 29, 2018 []This Week's Fund Focus In this week's Fund Focus Weekly, Jeff shares his thoughts on Vanguard's newly announced ETFs with environmental-social-governance, or ESG, objectives. While their expense ratios and the idea of doing no harm is compelling, the higher risk and lower average returns that have accompanied the original Vanguard SRI fund aren't a great combination. Then, Jim writes about a fund whose cyclical natures tends to take off in economic upswings. For the latest news on all things Vanguard and Fidelity as they happen, make sure to follow [Dan and Jeff]( and [Jim]( on Facebook. []Vanguard Market Flash: Do No Harm? By Jeff DeMaso The Independent Adviser for Vanguard Investors Let's start in Malvern this week. Vanguard announced Wednesday it plans to introduce two new ETFs with environmental-social-governance, or ESG, objectives. (ESG is the industry's new moniker for SRI, or socially responsible investing.) ESG U.S. Stock ETF will track U.S. stocks that meet FTSE's ESG criteria, while ESG International Stock ETF will track non-U.S. stocks. Their expense ratios, at just 0.12% and 0.15%, will be compelling. But will that be enough? Advertisement [The Independent Adviser for Vanguard Investors]( If the original Vanguard SRI fund, Social Index (VFTSX), is any indication, investors should be prepared for some higher-than-market risk as they follow their ESG consciences. Dan did the math, and over rolling 1-year, 3-year and 5-year periods since that fund's May 2000 inception, it has had lower lows and higher highs than Growth Index (VIGRX), probably its closest indexing peer, and both 500 Index (VFINX) and Total Stock Market Index (VTSMX). On average, Social Index's returns have lagged all three of these index funds over the more than 540 different time periods measured. Higher risk and lower average returns? Not a great combination. That's why I find it strange that the head of Vanguard's Portfolio Review Group, Jon Cleborne, made a point of telling Barron's that investors "aren't going to be harmed by these products." As far as I can tell, the indexes that Vanguard will track are new to FTSE, as I can't find any record of them online, so historical data is a mystery-if there is any to be had. I should also note that, according to FTSE, the barriers to entry for emerging market stocks in its foreign ESG indexes are lower than the bar for U.S. stocks, which, I think, should give investors pause. Maybe those low expense ratios will make up for any deficits in the index composition. We'll have to see. But for now, it's kind of like a black box. Brace yourself for politics to dominate headlines this summer as we head into the midterms, with a Supreme Court seat now a target for the right wing and the President emboldened by an affirmation of his travel ban. If that wasn't enough, trade war uncertainty remains as the Trump Administration waffles over how it plans to treat China, and Harley Davidson puts the lie to the notion that trade wars are always good. I'd guess that for most investors, the market declines feel worse than they actually are, given the headlines. So, take this opportunity to reaffirm your investment goals and check whether your worries are a result of near-term news or longer-term concerns. Then, assess whether your portfolio still meets your risk-return objectives and comfort level. It's always better to make that reassessment today rather than during the depths of a bear market or at the peak of a bull market. [Our Model Portfolios are designed with both risk and return in mind. Sign up for The Independent Adviser today.]( []Fidelity Fund Review: Select Air Transportation By Jim Lowell Jim Lowell's Fidelity Investor At a market cap of $2.4 trillion, the industrials sector comprises 10% of U.S. large-caps, as represented by the S&P 500 index. Industries in this sector are grouped into three major areas of business: manufacturing and distribution of capital goods; transportation; and commercial and professional services. Out of the 70 industrial stocks, 14 transportation companies soak up a healthy 22% of the sector. Transportation is an industry specialized enough to deserve its own category. Put simply, this industry includes companies that move goods and people from point A to point B. This includes road and rail businesses like Union Pacific (UNP), air freight & logistics like UPS (UPS) and airliners like JetBlue (JBLU). Transportation activity picks up more or less in concert with economic activity, so this sector of the economy often takes off on an early cycle runway. The cyclical nature of the transportation sector doesn't have to move in lockstep with economic activity, but it often mirrors it. The transportation of more goods, services and people reflects good times, and there's less transportation when times get hard. If you're looking for a sector that tends to outperform during economic upswings, transportation may be on your radar. Manager Matthew Moulis has piloted Select Air Transportation (FSAIX) since January 2012. Over that time, he's delivered a 181.1% return for shareholders versus 131.8% for the broader MSCI USA IMI Industrials index. The fund invests in 38 companies engaged in the regional and global air travel of passengers, mail and freight, with holdings in airliners (38.4% of assets), aerospace & defense (29.8%) and air freight & logistics companies (24.7%). Top 10 stocks in the fund include: Delta Air, UPS, Southwest Airlines, United Technologies, Expeditors International of Washington, Boeing, Spirit AeroSystems, American Airlines, Alaska Air Group, and FedEx. Recognize that because industrial subsectors tend to be cyclical, you shouldn't expect this fund to be a safe haven during a recession. During the 2007-2009 bear market, Select Air Transportation experienced the largest industrials sector fund decline, losing 61.3% vs. 50.9% for the S&P 500. At the same time, Moulis is a personal shareholder in this fund, so he eats his own cooking. When managers think like owners, shareholders win. To get a grounded sense of not just the transportation sector-air, ground, and rail-but also of the late-stage economic road we're on, read my conversation with Matthew Moulis in my upcoming July issue of Fidelity Investor. [Make sure you're a Fidelity Investor member by Monday, July 2.]( Until next week, this is Fund Focus Weekly wishing you a safe, sound and prosperous investment future. Dan Wiener, Editor, The Independent Adviser for Vanguard Investors Jeff DeMaso, Co-Editor, The Independent Adviser for Vanguard Investors Jim Lowell, Editor, Jim Lowell's Fidelity Investor [Like Dan and Jeff on Facebook]( [Like Jim on Facebook]( To prevent this email newsletter from getting swept up by an overzealous spam filter, please add our "From" address (FundFocus@InvestorPlace.com) to your address book. Comments? Send us an email to feedback@investorplace.com. MANAGE YOUR ACCOUNT We hope this timely investing advice is valuable to you. 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