Month: May 2022

Many investors are looking to build a portfolio that reflects their socially responsible values while giving them the potential for solid returns. That’s where SRI Investing, Impact Investing, and ESG Investing may play a role.

In the past, some investors regarded these investment strategies as too restrictive. But over time, improved evaluative data and competitive returns made these strategies more mainstream. Even though SRI, ESG investing, and Impact Investing share many similarities, they differ in some fundamental ways. Read on to learn more.¹

ESG (Environmental, Social, and Governance) Investing

ESG Investing stands for environmental, social, and governance investing. The model assesses investments based on specific criteria, such as ethical business practices, environmental conservation, and local community impact. The popularity of ESG investing has grown: in the United States alone, there are more than 500 ESG mutual funds and exchange-traded funds (ETFs) available. Just a decade ago, there were only 100 ESG funds.^2,3,4,5

SRI (Socially Responsible Investing)

SRI uses criteria from ESG investing to actively eliminate or select investments according to ethical guidelines. SRI investors may use ESG factors to apply negative or positive screens when choosing how to build their portfolio. For example, an investor may wish to allocate a portion of their portfolio to companies that contribute to charitable causes. In the U.S., more than $17 trillion are currently invested according to SRI strategies. This is an increase from the $12 trillion invested in SRIs by the end of 2017.^4,5,6

Impact Investing

Also known as thematic investing, impact investing differs from the two above. The main goal of impact investing is to secure a positive outcome regardless of profit. For example, an impact investor may use ESG criteria to find and invest in a company dedicated to the development of a cure for cancer no matter the outcome of that investment.¹

The biggest takeaway? There are plenty of choices to keep your investments aligned with your personal beliefs. No matter how you decide to structure your investments, don’t forget it’s always a smart move to speak with your financial professional before making a major change.

1. Investopedia.com, 2022
2. Investing in mutual funds is subject to risk and potential loss of principal. There is no assurance or certainty that any investment or strategy will be successful in meeting its objectives. Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. The prospectus contains this and other information about the funds. Contact the fund company directly or your financial professional to obtain a prospectus, which should be read carefully before investing or sending money.
3. Exchange-Traded Funds (ETFs) are subject to market and the risks of their underlying securities. Some ETFs may involve international risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility. ETFs that focus on a small universe of securities may be subject to more market volatility as well as the specific risks that accompany the sector, region, or group. An ETF’s trading price may be at a premium or discount to the net asset value of the underlying securities.
4. Morningstar.com, 2022
5. USSIF.org, 2022
6. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 FMG Suite.

At first blush, the idea of a bond that doesn’t pay interest seems oxymoronic. After all, isn’t a bond a debt instrument that pays periodic interest and repays the principal at maturity?¹

Zero coupon bonds are indeed debt instruments, but are issued at a discount to their face value, make no interest payments, and pay its face value at time of maturity.

How Does it Work?

Let’s say, a hypothetical zero coupon bond is issued today at a discount price of $743 with a face value of $1,000, payable in 15 years. If you buy this bond, hold it for the entire term and receive the face-value payment, the difference of $257 represents the interest you earned. In this hypothetical example, the bond’s interest rate would amount to approximately 2 percent.

Zero coupon bonds are predominantly issued by the federal government, and typically, they are issued with maturities of 10 to 15 years.

Zero coupon bonds are traded on recognized financial markets and exchanges, which may offer investors liquidity in the event they choose not to hold them to maturity.

Price Swings

One of the biggest risks of zero coupon bonds is their sensitivity to swings in interest rates. In a rising interest rate environment, their value is likely to fall more than other bonds.

Zero coupon bonds are subject to an unusual taxation in which the receipt of interest is imputed each year, requiring holders to pay income taxes on what is called “phantom income.”

Target Dates

For individuals, zero coupon bonds may serve several investment purposes. Zeros may be bought to fund specific future financial obligations, e.g., college savings. By placing them in a U.S. Treasury zero, a parent can be assured that the funds are expected to be fully intact to meet this liability.²

As with any investment, a zero coupon bond’s appropriateness hinges on your individual needs and circumstances. Understanding some of the basic concepts may help you better assess whether they might have a place in your portfolio.

1. The market value of a bond will fluctuate with changes in interest rates. As rates rise, the value of existing bonds typically falls. If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity an investor will receive the interest payments due plus your original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.
2. U.S. Treasury zero coupon bonds are guaranteed by the federal government as to the payment of principal and interest. However, if you sell a Treasury zero coupon bond prior to maturity, it could be worth more or less than the original price paid.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2024 FMG Suite.