Are You Invested in Modern Slavery with Vanguard?

How to find out if your Vanguard investments are in for-profit prisons and divest from them

If you read last weeks article about Vanguard being the largest investor in for-profit prisons through the passive funds it offers, you may be wondering if any of your Vanguard investments are in for-profit prisons. Mine were, and I had no idea. (See last weeks post here.)

Vanguard became the #1 investor in for-profit prisons by attracting lots of investors with its low fees. These investors then bought passively managed funds, like indexes, that include for-profit prison companies. While Vanguard’s low fees have helped its investors save money, they’ve done so at the expense of the human lives being moved through the prison system.

ESG is a new type of investing that seeks to align your morals with your investing strategy. ESG takes a company’s environmental, social or governance factors into consideration, and will exclude controversial companies in industries like tobacco, firearms, and for-profit prisons from its funds. Vanguard offers ESG funds that are similar to its other funds, but exclude these controversial companies. There are also entire firms that specialize in ESG investing that you can choose to open your accounts with. I’m going to show you how to apply an ESG strategy to your current portfolio with Vanguard and eliminate your investments in the for-profit prison industry.

How to find out if you’re invested in for-profit prisons

Most people have all of their investments in retirement accounts like a 401K. Chances are, you’re one of those people, so I’m going to focus on converting to ESG funds in retirement accounts. (If you aren’t familiar with retirement accounts, here is some info on them.) I have a Roth IRA account with Vanguard. If you have an IRA or Roth IRA, or any other account type with Vanguard, you will have all of their investment options at your disposal. If you have a 401K with Vanguard, your company has preselected the funds you are offered for your 401K. Basically, your company works with Vanguard to build a menu of investment options for you to choose from. Very few companies provide an ESG option to employees in their 401K offerings. If you go through these steps to find out that you are invested in for-profit prisons through your 401K, but aren’t sure how to proceed with the funds available to you, contact your company’s advisor to help you better understand your options.

Step 1. Login to your Vanguard account and select the holdings tab. You should see a list of your accounts and the funds they are invested in. In my Vanguard Roth IRA, I have chosen to use a target date fund. (For more info on target date funds, see this post.) These funds are composed of a group of other funds, so first, you will need to determine what other funds are held inside of the target date fund. Click on the symbol for the fund you’re currently using. The symbol for my account’s target date fund is VFFVX. If you aren’t using a target date fund, all of the funds in your portfolio are already listed. Find your domestic stock fund(s) and skip to step 3.

Step 2. You should now see all of the info about your transaction history with this fund. There is a section titled fund snapshot with a clickable link called fund profile. Click fund profile.

This page shows you all of the information about the fund you’ve selected. It details the risk, returns, and composition of the fund. We’re interested in the fund’s composition. Scroll to the bottom of the page and you will see a section called portfolio composition. Since the for-profit prisons are US companies traded on the NYSE, you can ignore any bond holdings or international stock holdings for now. In my case, I’m after the fund circled in pink below.

Step 3. Google search the name of your stock fund. Click on the investor.vanguard.com profile link for that fund. Scroll all the way to the bottom of the page and you will see a list of the month end 10 largest holdings. At the bottom of that section there is a clickable link called portfolio holdings. Click that link. Don’t worry. We’re almost there!

Step 4. Now you can see the full list of the stocks that are held in this portfolio. Mine totals 3,466 different companies! Click the little arrow next to the table heading “Holdings” to sort these into alphabetical order.

Now page over until you find the Cs. Look for CoreCivic Inc. on your list. If you find it, you’re invested in a for-profit prison. If you don’t find it, keep paging over until you can check for Geo Group. If you don’t find either company listed, woohoo! You aren’t invested in modern slavery. If you do find these companies, like I did, here are some options for how to remove these from your portfolio.

How to Divest from Modern Slavery

If you’ve accidentally invested in for-profit prisons through an index or target date fund, here is how you can divest these holdings.

The simplest way to do this is to search for a comparable ESG fund with Vanguard that does not include these companies. A quick Google search of Vanguard ESG funds will give you your options. When swapping your current investments into ESG funds, you’ll want to make sure the risk levels are comparable, the ESG fund is well diversified, and the fees aren’t high. You don’t want to swap a diversified index fund for an ESG that is comprised of all environmental stocks because this will decrease your portfolio’s diversification and increase your portfolio’s risk. While it may be tempting to invest your entire portfolio into companies you’re passionate about, remember that the point of investing is to make money. You can divest from companies that do not align with your morals, and still follow good investing practices like keeping a diversified portfolio.

If you have hand selected your investments, you can simply find a comparable ESG fund and swap your current holdings for the ESG fund. If you use a target date fund, like I do, this process is more complicated. A target date fund puts together an entire portfolio for you that includes domestic and foreign stocks, and bonds. It also automatically reallocates your investments to reduce your risk as you age. Since ESG investing is still in its infancy, there are very few target date funds (none through Vanguard) at your disposal. The ESG target date funds that do exist come with extremely high fees that will eat into your returns. Instead of opting for an ESG target date fund with higher fees, you can develop a low fee portfolio that mimics the holdings of your current target date fund.

The first step to do this will be to take a look at the percentages of each investment type your target date fund is comprised of. My target date fund has the following composition.

Next you will need to find comparable funds that don’t contain for-profit prison stocks and reallocate your portfolio to these funds. To do this, first find a comparable ESG fund for your domestic stocks. You can use the same search method we discussed earlier to find your options. Once you’ve selected your fund, you will need to put the same percentage of your money into that fund as is currently in your target date fund. For example, 54.2% of my target date fund is in domestic stocks, so I should move 54% of my money to the ESG fund I will now be using.

Next, you will need to buy a comparable global stock fund, domestic bond fund, and international bond fund. To find these, use the same process you used to find your ESG fund. When researching each fund, you should see the information below. Make sure your old fund and new fund are in the same investment category, carry the same risk level, and the descriptions of what they track are similar. Again, you want to make sure your new portfolio will be well diversified and mimic your target date fund. Once you’ve selected your global stock, domestic bond, and international bond funds, you will need to refer back to your original target date fund composition, and allocate your new investments at the appropriate percentages.

Following Up

Since you’re no longer using a target date fund, which automatically reallocated your investments to reduce your risk over time, you’ll now need to start doing this. Pick a time interval that you feel comfortable with. If you check your investments quarterly, maybe you will add in reallocating your investments to the correct percentages to mimic your old target date fund each quarter. If that sounds like too much for you, maybe you decide to do it annually. Just make sure that you don’t set it and forget it. The percentage allocated to each fund should also change over time to reduce risk, so you’ll also need to refer back to your old target date fund each year or every few years to check the portfolio mix.

While it was definitely more complicated to divest my holdings in for-profit prisons than I thought it would be, I learned a lot. ESG investing is on the rise, which means more options will begin to be available and the fees will continue to go down. Until those options become available, I will be taking a more active role in managing my portfolio in order to make sure I am not invested in for-profit prisons that traffic humans through their system to make money.

For research on ESG investing for this post, I spoke with Cameron Hamilton, CFP, MBA. Check him out here.

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