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Feb 28, 2019

Is Index Investing Truly Passive, or Actively Harmful?

Part one of a two-part series on why index funds help prop up an obsolete economy, and where you should be investing instead.

If you’re fortunate enough to be able to save for the future by investing in stocks, you’re probably invested in an index fund. The most common such funds, like the Vanguard S&P 500 or the T. Rowe Price Equity Index 500, are essentially designed to mirror the S&P 500. Most of us put money into such funds because we’ve grown skeptical of stock pickers’ ability to beat the markets and because index funds have lower fees than other financial products, such as actively managed mutual funds. And we’re told by experts that the S&P 500 is as safe an investment as you can make because it represents the mainstream economy.

In a meaningful way that’s true—the S&P 500 does reflect the mainstream, incumbent economy. But let’s look at the incumbent economy that that index is reflecting. It is an economy still predominantly powered by fossil fuels, with their climate-disrupting and health-damaging emissions. It is an economy characterized by unsustainable practices, such as the overuse in farming of pesticides and herbicides that are known toxins, that are degrading resources like our topsoil and water. The S&P 500 has dozens of companies that inflict these dangers upon the planet: Chevron, ConocoPhillips, Philip Morris International, Bayer (which recently bought Monsanto), Lockheed Martin, Halliburton, Duke Energy, Occidental Petroleum, Baker Hughes, Cummins Inc., Schlumberger NV, Raytheon, Anadarko Petroleum—the list goes on. Hell, if you buy $100 worth of the S&P 500, $1.42 invests in ExxonMobil alone.

The way I see it, the inclusion of these companies in the S&P 500 actually makes investing in the mainstream economy riskier, not safer. Because they are causing our most urgent crises, unless they change dramatically, they will have a difficult time surviving. Owning the companies in that index is the opposite of conservative, and probably not a good way to seek long-term returns if you think that civilization will endure and thrive in the future.

We can no longer coexist with what for now passes as the incumbent economy. We need what I call the next economy—one that leaves behind the risks of a fossil fuel-driven economy and moves towards true sustainability—and we need to invest to actualize that economy. The only way to de-risk your portfolio from the risks of climate disruption and resource degradation is to not own the companies causing those threats, which means not falling back on the ease of indexing. (I’ll write more later about the pros and cons of the relatively new ESG and “sustainable” index funds.) Know what you own and think carefully about what it means for your future planning—the reason you invest in the first place.

In part two of this argument, I’ll look at how holding the S&P 500 keeps some of our investment dollars locked out of the best growth opportunities coming from forward-looking businesses and their innovations.

See more on green investing here. 

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