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Hope Portfolio Overview

The Problem

Sometimes it can feel as if your voice will never be heard among countless others. Protests go unnoticed, causes go unfunded, and your vote doesn’t seem to make a change. There are more ways of making our voices heard and the one that often goes unnoticed is our investment choices.

If you have money in a 401k or other investment accounts, it isn’t merely in a faceless account: it is going to real people supporting real time business decisions. Twenty years ago, individual investors didn’t have much say in which companies they supported, but we now have more opportunity than ever to use our wealth to make a change. Progressive investing focuses on analyzing each investment to ensure your money is going to companies who are socially and environmentally responsible.

Unless you have hand selected every stock in your investment portfolio, there is a good chance your money is going to companies who don’t operate in a way that aligns with your values. If you’re invested in the stock market (S&P 500), here is where your money’s going:
       • 9% of funds are going to companies that own, extract, process or burn fossil fuels1
       • 1% of funds are going to companies that produce or manufacture tobacco2
        • 6% of funds are going to companies who manufacture or sell weapons3

If those numbers alarm you, you’re not alone. Due to rising environmental concerns, hundreds of investment options have been developed in recent years that seek to invest in companies that are environmentally and socially responsible. However, the following quote illustrates why there is still cause for concern:

“The problem with many of these ESG options is that they are not significantly more responsible than the broader stock market (S&P500)”

Demand Wealth founder, Brandon Mink

These broad portfolios have an “ESG” focus, which means they include companies that score highly on a range of Environmental, Social, and Governance criteria. While this helps investors ensure their money is going to more responsible companies, the wide scope can cast such a large net resulting in so-called “ESG” portfolios that contain big oil companies with little leadership diversity. Sadly, many of these popular “ESG” Portfolios are very similar to the stock market (S&P 500). The typical ESG portfolio includes 7% of funds going to companies that own, extract, process or burn fossil fuels and 2% of funds going to companies who manufacture or sell weapons.

While these numbers are slightly better than those of the broad market, they aren’t as impressive as you may hope. That’s why its important to look past the labels and beneath the surface of these “ESG” portfolios to ensure your investments are genuinely committed to the principles you stand by.

The Solution

“At Demand Wealth, we recognize the power that money has to enact change, and manage our ‘Demand Hope’ portfolio to be environmentally and socially responsible without necessarily sacrificing returns” 

- Demand Wealth Chief Operating Officer, J. Wade Ellison 

For our ‘Demand Hope’ portfolio, we include solid funds that have a measurable positive environmental impact and are working to enact social change. Not only does our ‘Deamand Hope’ portfolio limit the fossil fuel, tobacco, and weapons exposure, but it also invests in gender diverse companies and are MSCI ESG A-rated.

1. Data taken from fossilfreefunds.org
2. Data taken from tobaccofreefunds.org
3. Data taken from weaponfreefunds.org

       1. Fossil Fuel Exposure
The burning of these greenhouse gases produces around 21.3 billion metric tons of carbon dioxide every year. As we manage our portfolios, limit the amount of money that goes to companies who own, extract, process, or burn fossil fuels.

       2. Tobacco Exposure
Tobacco use is not only a health issue – it is an environmental issue. Cigarette butts are the most littered item in America and tobacco facilities release over 1.3 millionpounds of toxic chemicals every year. While it’s unlikely that tobacco will be illegal any time soon, our portfolios seek to avoid investments in the tobacco industry. Even though the tobacco industry comprises 1% of the market, we are committed to keeping our tobacco exposure at 0%.

Social Causes

Gender Diversity
While striders for equlality have been made over the past few decades, there are still many companies who discriminate against women. Our portfolio seeks to invest in companies who are taking real steps to increase gender equality within their sphere of influence.

We look for companies who practice gender equality among management and employees, have non-discriminatory recruitment policies, and are involved in initiatives to reduce human trafficking. The ‘Demand Hope’ portfolio contains stocks that are in the 70th percentile for gender equality factors in comparison to other options.

Weapon Exposure
Statistics currently show that one hundred Americans are killed with guns every day. Although you may already support anti-gun laws, most investment portfolios have a significant portion of money going to weapons dealers and manufacturers. The Demand  Hope’ portfolio seeks to minimize this exposure and is currently managed with less than 1% of funds being allocated to such companies.

Overall Sustainability
A good way to measure an investment’s sustainability is its MSCI ESG rating. Morgan Stanley Capital International (MSCI) rates investments based on three criteria: their environmental impact (how the company treats the planet), social responsibility (how the company treats people), and corporate governance (how the company makes decisions). The more responsible a company is in those three areas, the higher their score will be.

Each of our hope portfolios has an average “A” MSCI ESG ratings, so you can rest assured that your progressive portfolio is having a substantial environmental impact while maintaining sustainability.

4. ESG rating taken from www.etf.com as a weighted average of all funds included in the portfolio. “A” rated funds have an ESG rating above 5.70.

Investment Selection

Making sure that your investments are globally diversified and properly aligned is of paramount importance at Demand Wealth. Based on the results of your risk tolerance questionnaire, the appropriate allocation from 11 models within the ‘Demand Hope’ portfolio will be recommended. For example, a conservative investor will have a portfolio containing mostly bonds and light exposure to stocks, such as the ‘Demand Hope’ 10/90 (10% Stocks/90% Bonds). The opposite end of the spectrum holds true for someone more aggressive, where a 70/30 or 80/20 allocation containing mostly stocks and only a few bonds is more appropriate. Low fees, solid managers, low tracking error and high sharpe ratios are also factored in.

Low Expense Ratios
Past performance of an investment does not always indicatefuture performance. There is significant uncertainty in the investment world, but through that uncertainty, there is one constant: fees. Every fund has an expense ratio: this is the fee that a manager collects for managing each fund and is expressed as a percentage of the money that you have invested. The average ETF expense ratio is aorund 0.44%. While this may seem negligible, if your nest egg grows to $100,000, you end up paying $440 per year.

That’s why we choose funds with lower expense ratios. On average, our ‘Demand Hope’ portfolio has an expense ratio of 0.23%, so less of your money is going to managers and more of it is staying invested.

Reputable Managers
Even though past performance can’t predict future returns, fund managers can serve as a clue to a fund’s quality. We continually sort through thousands of funds and carefully select those with reputable managers.

Low Tracking Error
While Demand Wealth provides an actively managed overlay, most of the funds included in our portfolios are “Passive Funds”.  Passive funds that follow an index, such as the S&P 500, generally have lower expense ratios and have historically outperformed actively managed funds.  However, some passive funds track their underlying index more closely than others. The further away passive funds get from tracking the index, the more likely they are to deviate from that index.  We account for this by selecting funds that historically have low tracking errors.

High Sharpe Ratio
Imagine you are deciding between two different funds: Fund A and Fund B. One has an expected return of 10%, while the other has an expected return of 7%. At first glance, Fund A would seem to be the much better option. However, if Fund A took on significantly more risk than Fund B, then Fund B could have a better risk-adjusted return. That’s why it’s so important to consider risk as well return when looking at investment options.

The Sharpe ratio gives insight into this characteristic. An investment’s Sharpe ratio helps quantify how much return you’re getting compared to the amount of risk that you’re taking. Our portfolios are managed to contain funds that have yielded solid returns while taking on less relative risk.

Portfolio Management Strategies

Your Portfolio is continually being monitored by our team of financial professionals. We are constantly looking for opportunities to optimize your portfolio via Tax Loss Harvesting and Rebalancing strategies.

Tax Loss Harvesting
If you have a taxable account with multiple holdings, chances are there will be some down positions in any given year, even if your total portfolio is net positive. Tax loss harvesting is the process of selling investments at losses, which can provide a tax deduction (for 2020 up to a -$3000/ year loss can be written off against your annual income). 
Annually we will analyze the positions in your non-retirement accounts then sell the appropriate losses and repurchase them after the 31 day wash sale rule has been satisfied.  During this interim period, those funds will be invested in a placeholder similar to the sold position, so that your money stays comparably invested.

Rebalancing
Portfolio rebalancing is a staple of effective investment management. Demand Wealth sets your portfolio to an optimal allocation of stocks, bonds and real estate. This allocation will change over time as market conditions and investment performance evolve. Rebalancing is the discipline of resetting your portfolio back to its original optimal allocation. For example, your 50% stock/50% bond portfolio evolves to be 57% stocks/43% bonds after a period of time. Rebalancing involves selling enough stocks and buying enough bonds to reset your portfolio back to its appropriate 50%/50% allocation. Of course, as your financial situation changes, Demand Wealth works to ensure that your portfolio stays properly diversified, optimized and in sync with your financial goals.

The Demand Wealth rebalancing process is performed by our skilled team. Unlike many of the robo-strategies, which only rebalance at a defined interval (e.g. +/-10%), a Demand Wealth portfolio manager rebalances your portfolio when it makes optimal sense. We also incorporate macroeconomic factors which may evolve over years, rather than months, that current computing models simply aren’t able to perform.

Demand More from your investments, planningand advice. Open a ‘Demand Hope’ portfolio with us today!

Environmental, Social, and Governance [ESG] criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments.