Investing Archives

Feb

2025

What is Greenwashing? Definition, Types & Examples

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

With the rise of environmental and climate-related concerns, more people are becoming familiar with the term greenwashing — which is when a company markets itself as more sustainable or environmentally friendly than it actually is.

Greenwashing impacts investors and consumers alike because it’s designed to mislead people through a variety of means, including: the use of vague terminology or false labels; making claims about green actions or outcomes that can’t be verified (or are found to be deceptive); using false or misleading research and data.

The term greenwashing is derived from the notion of whitewashing, which is when a company or individual conceals wrongdoings by presenting a cleaned-up, but deceptive version of their actions.

Key Points

• Greenwashing is when a company markets itself as more sustainable or eco-friendly than it is.

• Companies may engage in greenwashing to attract consumers, employees, or investors.

• Greenwashing can also be an attempt to avoid stringent or costly regulations.

• Common greenwashing techniques include misleading labels, vague or meaningless terminology, a deceptive use of data, and more.

• It’s vital for investors, as well as consumers, to look beyond an organization’s eco-friendly claims to verify whether they are adhering to ESG standards.

Types of Greenwashing

For some companies, greenwashing is a means to attract consumer and investor dollars. According to the 2023 Business of Sustainability Index, 68% of consumers said they’re willing to spend more money for environmentally friendly products.

But some companies engage in greenwashing to appear compliant with environmental regulations, which can be stringent and come with hefty penalties — especially now that some countries, like the EU. and U.K., are adopting anti-greenwashing laws.

Before you buy products marketed as sustainable or eco-friendly, or invest in a green company that makes similar claims, it may help to know the different types of greenwashing.

• Greenwashing a polluting product: Companies may attempt to improve the branding of a product by making it seem more environmentally friendly without actually changing much or anything about it.

• False associations: Brands can make it seem like they are endorsed by a third party when they really aren’t, or the third party is simply their own subsidiary.

• Green products from a polluting company: A company might make a product that has a lower environmental impact, such as an electric vehicle, but manufacture it in a way that creates significant waste and greenhouse gas emissions nonetheless.

Again, because socially responsible investing has grown so rapidly, and many companies want to attract the attention of investors and consumers with a green sensibility, there is commensurate growth on the greenwashing side, so it pays to be cautious when making choices.

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Example of Greenwashing

Greenwashing is increasingly on the radar of regulatory bodies that protect consumers and investors. But some watchdog organizations lack the resources to hold companies to account. A few examples of what would be considered greenwashing are described on the U.S. Federal Trade Commission (FTC) website:

• A company labels a trash bag they are selling as “recyclable.” Although this may be true, it’s unlikely that a bag full of trash will be emptied and then recycled on its own. This label makes the product appear to have an environmental benefit, but in reality it doesn’t.

• In another example, a company labels a product as having 50% more recycled content than a previous product did. This makes it sound like a significant amount, but in fact the company may have increased the recycled content from 2% to only 3%, so in reality there has been hardly any change.

• A company labels a product as “recyclable” but they don’t say specifically whether all parts of it are recyclable, just some parts, or just the packaging.

Other real-world examples include: An oil company that’s known for environmental negligence releases advertisements that state their dedication to a carbon-free future — or companies promising to do environmental cleanups, but failing to actually follow through on those promises.

The Negative Impacts of Greenwashing

Although in the short term greenwashing might benefit a company if it leads to more people buying their products, the risk is that a revelation of greenwashing practices could quickly and negatively outweigh those gains.

The Impact on Consumers

If consumers catch on that a company is engaging in greenwashing, rather than adhering to ESG standards, there could be a public relations backlash. Consumers may feel duped, and may express their discovery of a company’s contrary claims in various ways: with other consumers, on social media, writing to elected officials, contacting the Better Business Bureau.

Depending on the scale, and the level of consumer awareness, this has the potential to damage a company’s reputation and trustworthiness, and cause consumers to turn to other brands.

In addition, companies that get caught greenwashing can also face legal ramifications for their misleading claims. And investors interested in true impact investing may take their business elsewhere.

The Impact on the Environment

In the long term, the biggest negative consequence is the actual environmental impact of manufacturing and other business practices that are not, in fact, green or sustainable. By using green claims to bolster their business goals, yet not living up to actual sustainability standards, companies not only add to environmental damage, they hinder efforts to create sustainable products and reach other socially responsible goals.

Companies rely on clean water and air, quality soil, viable supply chains, and a stable climate to operate. A thriving economy requires a healthy planet, and greenwashing ultimately doesn’t support either.

The Impact on Investors

Just as many consumers are seeking a clearer understanding of the environmental claims of various products and consumer goods, investors are looking for ways to vet the claims of financial companies that offer ESG-focused securities, like exchange-traded funds (ETFs) and mutual funds.

This has led some organizations to develop ESG frameworks, in order to provide investors with a way to assess companies’ ESG progress, and use accepted standards and metrics to compare one company to another. Companies that make ESG claims for their investment products can come under regulatory scrutiny, and may face substantial fines.

How to Spot Greenwashing

Many greenwashing tactics can be convincing. Here’s what to look out for when purchasing a product, or investing in a company that claims to embrace sustainability or ESG investing strategies (i.e., environmental, social, and governance practices):

• Vague language: Labels such as “eco-conscious,” “clean,” or “100% sustainable” don’t actually mean anything in terms of a company’s manufacturing processes or adherence to environmental criteria. Be sure to research ESG standards that reflect actual environmental practices.

• Natural imagery: If a polluting company uses marketing images of flowers, trees, beaches, and so forth, they may be trying to appear more environmentally friendly than they really are. Be sure to check whether the company or product lives up to the advertising.

• Fabricated data: Companies might fund research that will provide “results” that make them look better, or make data up completely. In some cases, it’s easy to vet company research or data via the company website or by doing an internet search.

• Grand claims: Some companies may pledge to reduce carbon emissions or announce a net-zero policy (or another ambitious goal), with little to back up the claim.

How to Avoid Greenwashing

Whether purchasing products or investing in companies, if you are looking for the most sustainable options, there are a few ways to avoid greenwashing.

1. Look for Clear and Transparent Language

If a brand makes sustainability claims, look for specifics such as certifications, verifiable third-party endorsements, industry credentials, and details about exactly what the brand is doing.

2. Evaluate the Data

If a brand uses statistics and numbers to back up its sustainability claims, make sure the numbers are backed up with credible data.

3. Compare Similar Products

A company may make sustainability claims when in fact their product has basically the same environmental impact as a competitor’s. Compare ingredients, packaging, and manufacturing information to see whether one product is really better than another.

4. Look Beyond the Final Product

Even if a company is improving the impact of its products, it may not be addressing the waste and emissions associated with its operations or supply chain. If this is the case, they may be just making changes for marketing purposes. Check out a company’s website and/or follow watchdog groups to learn how much effort is going into sustainability at the corporate level.

5. Look for Goals and Timelines

If a company is truly implementing a comprehensive sustainability plan, it would include measurable goals and timelines. Ideally those would be available to investors and consumers on a public forum such as the company website, in the interest of transparency.

6. Verify Ingredients and Materials

Some terminology and product labels can be misleading. For instance, a company might say that their product is made from organic cotton or recycled plastic, when in fact only a small percentage of the cotton or plastic is organic or recycled and the rest is not.

The FDA has no guidelines for what the term “natural” means, and according to the USDA the term simply means that a product is “minimally processed” with “no artificial ingredients.”

Greenwashing vs. Green Marketing

Although greenwashing is when a company attempts to cover up their bad practices, there is nothing wrong with a company telling the story of its environmental initiatives, and the steps it’s taking to produce products more sustainably.
That’s green marketing at its best and most transparent.

How to Recognize Green Marketing

Actual green marketing may include:

• Certifications and endorsements from established regulatory organizations

• Clearly labeled manufacturing processes

• Recyclable, compostable, or biodegradable materials (but watch out for these labels, sometimes a product can actually only be composted or biodegrade in very specific conditions that aren’t realistic).

• Products free from toxic chemicals

• Use of renewable energy

• The use of transportation measures such as EVs

• Purchase of carbon offsets for any unavoidable emissions

• In-office programs and measures such as renewable energy, LEED certified buildings, on-site composting, or elimination of single use plastic

• Doesn’t use too much packaging, and ideally avoids plastic packaging

• Circularity programs that allow consumers to send back the product for repair or reuse

• High-quality manufacturing made to last rather than one-time or short-term use

• Fair trade and ethical labor practices

• Environmental programs outside the company, such as donations or volunteer efforts

Greenwashing Regulations

There are currently no laws in place to prevent greenwashing practices in the U.S. The FTC does have a set of Green Guides, which are not mandatory, but can help companies avoid falling into greenwashing territory.

Globally, the outlook for anti-greenwashing measures is somewhat more robust. The last couple of years have seen a rise in anti-greenwashing policies or preliminary taskforces in various countries around the world.

• The EU Green Claims Directive is a new law that was approved by the European Parliament in 2024, and is now being enacted by member states, with a September 2026 target date for implementation.

• In the U.K., the Green Claims Code is a set of principles that businesses must adhere to, or face regulatory consequences.

The Takeaway

Greenwashing is a marketing tactic some companies use to align themselves with the growing consumer and investor desire for sustainable products and investments. It’s related to the concept of “whitewashing,” which means covering up the truth with a positive-sounding story.

Investors committed to sustainability can look for red flags of greenwashing before deciding whether to invest.

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FAQ

What is ESG greenwashing?

ESG greenwashing is the practice of using marketing tactics to exaggerate an organization’s environmental, social, or governance efforts in order to attract customers, employees, investors, or positive media attention.

What are the three most common kinds of greenwashing?

Three common types of greenwashing are the use of environmental imagery, misleading labels and language, and hidden tradeoffs where the company emphasizes one sustainable aspect of a product — while still engaging in environmentally damaging practices.

What is the role of regulations in combatting greenwashing?

Ideally, regulations against greenwashing practices will deter companies from false and misleading practices. Regulations can establish standards that result in clearcut penalties in the case of greenwashing violations. As of early 2025, there are only a few anti-greenwashing regulations in effect, worldwide.

Photo credit: iStock/fizkes

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SOIN-Q424-106

Feb

2025

Investing in Alcohol Stocks

By Samuel Becker | Growing Wealth, invest, Investing, Terminology, Tools & Calculators | Comments Off

Investing in alcohol stocks may be appealing to some investors, as alcohol is not only a consumer staple with steady demand, it’s generally considered a recession-proof industry. That doesn’t necessarily translate into stock performance, of course, but it can be one reason that investors find alcohol stocks appealing.

Nonetheless, investing in alcohol stocks can have its drawbacks. Some investors may be turned off by the industry itself. And there are risks that can affect the alcohol industry, too, such as supply chain issues, or even political and societal changes. Don’t forget that during the Prohibition Era in the United States (1920 to 1933), it was illegal to manufacture, transport, or sell alcohol for consumption.

Key Points

• Investing in alcohol stocks may be appealing due to recession resistance and growth in emerging markets.

• The alcohol industry is valued at nearly $2.3 trillion as of 2024, with an estimated annual growth rate of 10.74% from 2024 to 2030.

• Types of alcohol stocks include large multinational corporations, craft breweries, distilleries, and alcohol distribution companies.

• One of the key growth areas in the alcohol beverage market is the expansion of ready-to-drink products (RTD).

• Sector risks include regulatory challenges, changing consumer preferences, competition, market saturation, and ethical concerns.

Overview of the Alcohol Industry

The alcohol industry is large, worth about $2.3 trillion as of 2024. It’s also projected to grow by a compound annual growth rate (CAGR) of 10.74% each year between 2025 and 2032. As a point of comparison, the global pharmaceutical industry is worth about $1.6 trillion as of 2023.

A Broad Sector

The industry itself consists of different types of companies and sub-industries. For instance, there are myriad types of alcoholic beverages, the companies that produce them, and the companies that distribute them.

Alcoholic beverages include beer, wine, ciders, spirits (hard liquor), hard seltzers, and more. Ready-to-drink (RTD) products are proving to be a growth area, with pre-made canned cocktails that combine different beverages and flavors with wines or spirits or ciders gaining market share.

The popularity of certain beverages tends to vary by region. Beer might be more popular among consumers in a place like Wisconsin, with its history of brewing, while wine may be more popular among drinkers in Northern California, owing to its focus on wine production.

Alcohol-Related Investments

The industry as a whole also depends on a network of alcohol-adjacent companies that might appeal to investors. In addition to brewers and alcohol producers, there are companies that distribute beverages or products. There are retail stores that sell them. And there are countless companies in between, too, that do marketing, product development, or other types of work for alcohol companies.

For investors interested in alcohol stocks, that means there’s plenty of opportunity to invest in the industry.

Consumer Staple or Luxury Goods?

Alcohol stocks, although a type of sin stock or vice stock, are generally considered a consumer staple. Because demand is generally steady for alcohol products, even in a recession, alcohol stocks have some of the qualities of other non-cyclical consumer goods like bread or shampoo.

But alcohol purchases also fall under discretionary spending, and as such some alcohol investments can be considered a luxury good.

Types of Alcohol Stocks

As noted, there are many different types of stocks in the alcohol industry. Those include large, multinational corporations, small craft breweries or distilleries, alcohol marketing and distribution companies, equipment manufacturers, and more.

Large Multinational Corporations

The biggest corporations involved in the alcohol industry can encompass a variety of functions. Some, for instance, may produce alcoholic beverages and distribute them as well. But the main thing to know about companies in this category is that they tend to be publicly held stocks with larger market capitalizations — large- or mega-cap stocks — with branches all over the world.

Craft Breweries and Distilleries

Craft breweries and distilleries consist of stocks that are generally smaller, though many craft brewers have been absorbed into larger companies. But generally, these would likely be small-cap stocks in the alcohol production industry.

Alcohol Distribution Companies

Stocks of alcohol distribution companies would involve companies that move alcoholic beverages from one place to another — generally, from a company producing the beverages to the retailer or wholesaler selling them to businesses or the public.

In other words, these are companies involved in the alcohol supply chain, and can include packaging, shipping, and delivery companies.

Factors Influencing Alcohol Stocks

Since alcohol is a regulated substance, and that regulation differs from country to country (and from state to state), there can be a number of factors that influence alcohol stocks’ valuation from a legal perspective.

For instance, in some states, you can buy a six-pack of beer at a convenience store. In other states, that’s against the law; you’d need to buy beer at a designated alcohol retailer, like a liquor store or beer distributor. With that in mind, those rules and regulations can change, too, and that means that political or regulatory changes could potentially have an effect on alcohol stocks.

Economic Impacts

There are also economic factors to take into consideration. As noted, alcohol has sometimes been called a recession-proof industry, since consumption tends to be steady over time. But significant events, like the Covid-19 pandemic, can dramatically increase or decrease consumption.

In addition, companies involved in the alcohol sector can and do feel the effects of the overall economy. So, if there’s an economic downturn of some kind, there’s a chance that these stocks could see their valuations affected as well.

Consumer Trends

Changing consumer tastes are also something that affects the alcohol industry. That includes the types of drinks that people are buying. Ciders and alcoholic seltzers have become popular in recent years, as an example, in addition to pre-made cocktails and other RTD products.

Demographics can also introduce new factors into the alcohol stocks market. For example, younger Americans (Gen Zers) are drinking less than previous generations — which is something that alcohol companies will need to take into consideration, unless the trend reverts.

Pros of Investing in Alcohol Stocks

For thinking about investing in stocks in the industry, there can be some upsides to adding alcohol stocks to your portfolio. Those can include the potential recession-resistant nature of these stocks, as mentioned above, in addition to brand loyalty, and potential growth in emerging markets.

Steady Consumption

As discussed, like many consumer staples the consumption of alcohol tends to be constant. In addition, there is some truth to the notion that consumers like to drink when times are good and also when times are tough. But it’s not necessarily true that these stocks will be safe havens during economic downturns.

Alcohol stocks may perform better than stocks in other categories during a recession, but there is no guarantee that will happen. This sector is subject to its own risk factors, including ingredient costs, consumer trends, political issues, and more.

Brand Loyalty and Pricing Power

Some consumers exhibit high levels of loyalty to certain brands of liquor, beer, and wine. In fact, research shows that alcohol is one category of consumer goods in which consumers tend to be highly loyal to certain brands.

That can be a good thing for investors to keep in mind, as brand loyalty often translates to sales — but not always.

Potential for Growth in Emerging Markets

There’s also the potential that alcohol companies could find traction, and revenue, in emerging markets. For instance, in recent years, it’s expected that countries like India, China, Brazil, and Mexico will see demand for alcohol beverages increase, which could lead to more sales for alcohol companies — and potentially, returns for investors.

Again, it’s important to bear in mind the inherent risks in any emerging market, which can include political or economic upheaval that may roil markets or impact local consumption of consumer goods.

Cons and Risks

While there are potential benefits to investing in alcohol stocks, there are drawbacks, too. Here’s a rundown.

Regulatory and Legal Challenges

As previously discussed, there are many local, state, and federal regulations that govern the production and sale of alcohol. Those rules differ from place to place, and can take a variety of forms: some dictate how and where alcohol can be sold, for instance, and in some places, there are certain times of the day or week where alcohol sales are prohibited.

In some cases, an entire town may be legally “dry” — and alcohol cannot be sold there (but may be available in a neighboring vicinity).

Depending on the type of alcohol investments being considered, understanding the implications of local laws is important.

Changing Consumer Preferences

Also as discussed, consumer tastes wax and wane — and if some start moving away from drinking alcohol for one reason or another, there could be an effect on the industry at large, and investors. That doesn’t mean that alcohol companies can’t pivot, of course, but keeping up with current consumer demands can and will eat up resources, too, potentially affecting investors.

Competition and Market Saturation

There are myriad alcohol companies out there, big and small. No matter where you are, for example, you’re probably not too far from a bar, a store that sells beer, or some other way to get your hands on a drink.

In other words: the alcohol market is big, and it’s saturated. That can mean there isn’t a whole lot of room for alcohol stocks to grow.

Top Alcohol Stocks to Consider

While there are many alcohol stocks on the market, here are the five biggest U.S. companies by market cap:

• Anheuser-Busch Inbev: The maker of popular brands such as Budweiser, Corona Extra, and Michelob.

• Heineken: Makes Heineken, Amstel, and more.

• Constellation Brands: Produces a wide variety of beer, wine, and spirits.

• Diageo: Makes spirits such as Captain Morgan, Johnnie Walker, and Smirnoff.

• Brown-Forman: Produces spirits such as Jack Daniel’s and Woodford Reserve.

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How to Invest in Alcohol Stocks

As far as actually investing in alcohol stocks goes, it’s not much different than investing in any other type of stock. There are a few ways to add alcohol stocks to your portfolio.

Direct Stock Purchase

You can buy alcohol stocks directly and add them to your portfolio, for starters. That means firing up an existing brokerage account, or opening a new one through a brokerage, choosing the specific alcohol stocks you want to buy, and purchasing some shares (read more about the difference between shares vs. stocks).

ETFs and Mutual Funds Focused on Alcohol

Investors can also add alcohol stocks to their portfolios by purchasing certain ETFs (exchange-traded funds) or mutual funds.

These types of funds can focus or specialize in specific industries, such as the alcohol sector. Investing in mutual funds or ETFs may also be a way to hedge risk when investing in the sector, as funds tend to have a degree of built-in diversification. Not that alcohol stocks are high-risk investments necessarily, but for more cautious investors, funds may be worth checking out.

Analyzing Alcohol Stocks

Doing your homework before buying stocks is important if you’re hoping to maximize your returns, or at least not lose your initial investment. While there’s no guarantee that you won’t, you can do some basic research and due diligence on the stocks that you’re thinking of investing in.

That may include doing some fundamental research, such as checking out the financial metrics and earnings reports of specific companies. It can also involve looking at the overarching trends and risks affecting the industry, too.

Ethical Considerations

There may also be ethical concerns that investors need to contend with as well when thinking about investing in alcohol stocks. Alcohol is a dangerous substance — it’s addictive, is associated with diseases and negative health effects, and more. There’s a reason that it’s regulated.

As such, some investors may not be comfortable with adding alcohol companies to their portfolios.

The Takeaway

Investing in alcohol stocks may be a way to diversify your portfolio, but investors should be aware that there are some unique risks (and potential benefits) to investing in the sector. There may also be ethical considerations investors want to think about as well, though that’ll depend on their individual preferences.

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FAQ

How do economic downturns typically affect alcohol stocks?

Economic downturns may see alcohol companies’ shares lose value, but they may not lose as much value as other types of stocks, since consumers tend to buy alcohol no matter the prevailing economic conditions. There are no guarantees, though, that past trends would continue during future downcycles.

What are the main subsectors within the alcohol industry for investors?

Investors may consider investing in companies that produce the main types of alcoholic beverages, such as beer, wine, or spirits.

How do changing consumer preferences impact alcohol stock performance?

Consumers’ preference can and do change, and that may affect alcohol stock performance in that sales may dip or increase. Further, if companies need to pivot into different products, that may eat up additional resources, affecting stock performance as well.

Photo credit: iStock/mihailomilovanovic

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SOIN-Q424-008

Feb

2025

What Is the Dow Jones?

By Matthew Zeitlin | Growing Wealth, invest, Investing, Terminology | Comments Off

The Dow Jones Industrial Average is one of the earliest examples of a stock index, a collection of 30 blue-chip company stocks that are calculated into one number that’s supposed to represent the U.S. stock market as a whole or a subset of it.

Now, there are hundreds of indexes, which represent everything from smaller companies (The Russell 2000), to specific industries, like the KBW Bank Index, to the S&P 500, an oft-cited index that represents a broad cross-section of America’s largest companies. But the Dow is still watched, domestically and worldwide, as a leading market indicator.

Key Points

• The Dow Jones Industrial Average is a stock index of 30 blue-chip company stocks, reflecting U.S. market performance.

• Unlike market capitalization-weighted indices, the Dow is price-weighted, based on per-share prices.

• Companies in the Dow include Apple, Microsoft, Disney, and Walmart, representing various sectors.

• Since 1896, the Dow has expanded from 12 to 30 companies, including more diverse industries.

• The Dow is a significant benchmark for investors, indicating market trends and sentiment through its performance.

What Is the Dow Jones Industrial Average?

The Dow Jones Industrial Average, or just “the Dow,” is based on the performance of 30 companies that represent the industry leaders in the world economy: Apple, Microsoft, JP Morgan Chase, Nike, Coca-Cola, Walmart, Disney, along with companies like 3M or Caterpillar that you may not be as familiar with, but are massive and play an important role in business in the United States and around the world.

The Dow is considered an index of blue-chip companies, which signals not only some of the largest companies, but also the most solid and well established.

Nonetheless, the companies on the Dow Jones Industrial Average change regularly, reflecting changes in the U.S. economy.

It’s important for investors to follow the Dow, as it’s one of the leading stock market indicators. And while it’s certainly not the only one, understanding the Dow’s movements in addition to other indicators can help inform your investing strategy.

What Makes the Dow Jones Industrial Average Different?

The Dow Jones Industrial Average is just one of many collections of stocks whose value is represented in a single number. The Dow Jones Industrial Average isn’t just distinct because of its age, but because of how it’s calculated.

The other two major stock indices that are frequently cited as bellwethers of the overall market, the S&P 500 and the Nasdaq Composite, are both “market capitalization weighted,” whereas the Dow Jones Industrial Average is “price-weighted.”

That means that the Dow Jones Industrial Average’s “points” are calculated from the per-share price of every stock in the index, as opposed to the company’s overall value. As such, the DJIA doesn’t reflect the overall stock market return, but rather it can be used as a gauge of market trends and/or investor sentiment.

In a market-weighted index, the influence any given stock has over the index’s overall value is determined by a company’s market capitalization or market cap. A company’s market cap is determined by multiplying the number of shares by the value of the stock.

In this type of index, the influence of a company is determined by how valuable the company is, not solely by the price of a stock.

Example of How Stock Price Can Skew an Index

Apple only joined the Dow Jones Industrial Average after it did a stock split, lowering its per share price from around $650 to under $100, but increasing the number of shares by seven. Had it split its stock before joining the Dow, it would have entered the index with a price of nearly $900, as opposed to around $126, giving the company an outsize role on the index.

Because the Dow Jones Industrial Average is price-weighted, adding companies with hefty per-share price tags could cause problems. That’s the main reason that companies like Alphabet, the parent company of Google, and Amazon, aren’t included in the index. On the other hand, Microsoft, which is worth more than $3 trillion as of early 2025, is priced at more than $400 per share and is a member of the Dow Jones Industrial Average.

The Dow Divisor

Today’s economy is far different from the late 19th century or the late 1920s — the number of industries in which the U.S. has large, established companies has grown, and the size of those companies is bigger.

In order to account for some of these changes over time, the Dow Divisor is used to determine the value of the Dow Jones Industrial Average. Using the Dow Divisor can help in historical comparisons and account for differences that may arise due to a stock split or other factors.

How the Dow Jones Industrial Average Changed Over Time

The Dow Jones Industrial Average is intimately tied up with the history of the markets and American financial journalism. The Dow Jones Industrial Average is just eight years younger than the Wall Street Journal, which was founded in 1889, while the Dow Jones Industrial Average was founded as a 12-company index in 1896.

The Dow Jones Industrial Average was originally developed by Charles Dow and Edward Jones. But it wasn’t the first ever stock index; that title belongs to the Dow Jones Transportation Average, a collection of railroad stocks that Dow came up with in 1884.

The 12 companies initially included in 1896 were companies that reflected the shape of the American economy — largely manufacturing and agricultural companies and the transportation networks that helped move goods. The companies included in that first year were:

• American Cotton Oil

• American Sugar

• American Tobacco

• Chicago Gas

• Distilling & Cattle Feeding

• General Electric

• Laclede Gas

• National Lead

• North American

• Tennessee Coal & Iron

• U.S. Leather

• U.S. Rubber

The Dow Jones Industrial Average in the 20th Century

The index was expanded to its current number of 30 in 1928, and by 1932 the Index started to resemble the American economy as we might recognize it today, with a mixture of manufacturing (General Motors, Chrysler), retail (Sears, Woolworth), consumer (Coca-Cola, Procter & Gamble) technology (IBM) and energy (multiple descendants of John Rockefeller’s Standard Oil).

The first companies associated with the personal computer revolution came much later (IBM being an exception), with Hewlett-Packard getting added in 1997, Intel and Microsoft added in 1999, and Apple only joining the Dow in 2015, when it replaced AT&T.

Walmart was added to the index in 1997. America’s entertainment industry, one of its leading export industries, was only represented in the index in 1991, when Disney was added.

Right now the Dow Jones Industrial Average “covers all industries except transportation and utilities,” according to S&P Dow Jones Indices.

While the Dow Jones Industrial Average is managed by S&P Dow Jones Indices, it still retains a connection with the Wall Street Journal and its publishing company, Dow Jones. The editor of the paper is part of the committee that determines membership in the Dow Jones Industrial Average.

The Takeaway

Investors can look to the Dow Jones Industrial Index as an overall indicator of how the largest companies in the U.S. are performing. Historically, the Dow Jones Industrial Average has shown similar returns to the S&P 500, which tracks 500 large-cap U.S. companies.

Indexes, like the Dow Jones Industrial Index, can provide helpful insight for investors. They can be used to help investors compare current and past stock prices, to determine the market performance. Understanding this information can be helpful to investors as they review their own portfolio and adjust their investing strategy.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SOIN-Q125-032

Feb

2025

What Is an ESG Index? 5 ESG Indexes to Know

By Kenny Zhu | Growing Wealth, invest, Investing, Terminology | Comments Off

An ESG index consists of companies that meet certain criteria for environmental, social, and governance performance. An ESG index can be used as a benchmark for companies in that industry, region, or sector, just as a large-cap equity index like the S&P 500 can be used as a benchmark for the performance of large-cap U.S. stocks.

The challenge in most aspects of ESG or sustainable investing, including the construction of different indexes, is that most ESG standards are voluntary and can be inconsistent in the criteria and metrics they use to evaluate companies’ progress toward ESG goals, or mitigate ESG risks.

Nonetheless, recent research suggests that ESG investing strategies perform similar to conventional strategies. By knowing some of the top ESG indexes, then, it’s possible to invest in funds that track the performance of that index, and put your money toward companies whose aim is to focus on positive environmental, social, and corporate governance outcomes.

Key Points

• An ESG index consists of companies that meet criteria for environmental, social, and governance standards.

• An ESG index may also exclude certain companies or sectors (e.g. fossil fuels, gambling, adult entertainment) or those with low ESG scores.

• An ESG index can be used as a benchmark for securities in an industry, region, or sector.

• There are some 50,000 sustainability-oriented indexes, according to Morningstar.

• Owing to inconsistency around ESG criteria and metrics, it can be difficult to evaluate companies’ progress toward ESG goals, or compare one company to another.

What Are ESG Indexes?

An index is a selection of companies that reflect the performance of a certain industry, region, or sector. There are thousands of indexes, and they are constructed as benchmarks of the performance of that part of the market: e.g., large-cap companies, tech companies, pharmaceuticals, consumer goods, and so forth.

An ESG index focuses on companies that meet certain environmental, social, or governance standards. There are some 50,000 sustainability-oriented indexes, according to Morningstar. There are broad-based indexes as well as specific indices that focus on a certain industry, region, sector: e.g., renewable energy, water-treatment, carbon management, and so on.

Some ESG indexes may exclude companies that don’t match typical ESG criteria. For example, some ESG indexes exclude companies that manufacture certain types of weapons, are involved in gambling, or produce fossil fuels.

ESG indexes have become more common as investor interest in ESG investing strategies has grown.

Reason for ESG Indexes

Some investors believe in investing their money in the stocks of companies (or other securities) that reflect proactive values regarding the planet, society, and fair and ethical corporate structures. At the same time, adherence to ESG frameworks is considered by many stakeholders as a form of risk management.

For example, investors might choose to assess a company’s ESG scores or ratings to gauge its risk exposure (as well as possible future financial performance). Whether they invest online or using a brokerage, investors might want to know about a company’s environmental and social practices to inform their purchasing decisions.

While you cannot invest in an index, investors can gain exposure to ESG companies in an index by purchasing an index mutual fund or exchange-traded fund (ETF) that seeks to replicate the performance of that index (a.k.a., passive investing).

There are hundreds of ESG index mutual funds and ETFs that investors can access.

ESG Criteria Explained

Although there isn’t a single set of ESG criteria investors can use to measure where companies stand in light of ESG goals or risk factors, it’s useful to know what different ESG scores and metrics are referring to.

Environmental Factors

The environmental component of ESG includes factors that impact the natural environment. These can be general, or tailored to specific industries, and may include:

• Water, air, and other pollutants (e.g., toxic waste)

• Hazardous waste management

• Carbon emissions and mitigation efforts

• Water conservation

• Renewable energy use (such as solar, wind, biofuels)

Social Factors

The social component evaluates a company’s relationships to employees, vendors, and the surrounding community. Factors may include:

• Worker safety

• Diverse hiring practices

• Employee pay and equity

• Corporate investment in the community

• Relationships with vendors

• Supply chain management (fair labor use, sustainable sourcing, etc.)

Governance Factors

Governance refers to ethics and transparency in how a company is managed. For example:

• Selection of board of directors

• Executive compensation

• Transparency toward shareholders

• Accounting practices

• Data privacy

Recommended: How to Invest in ESG Stocks

Mixed Growth in the ESG Sector

The ESG sector is still seeing some growth, although not as robust as in recent years. According to Morningstar, global ESG fund assets rose to $3.3 trillion in Q3 of 2024, from $3.1 trillion in Q2 ‘24, and roughly $2.8 trillion YOY, as of September 2024.

Yet ESG fund outflows in 2024 were the highest they’d been since Morningstar Sustainalytics started tracking them in 2015, at $19.6 billion, topping 2023, which saw outflows of $13.3 billion.

Also, the number of new ESG funds that were launched in 2024 was around 10, compared with more than 100 in 2021 and 2022 566 in 2023.

ESG vs Socially Responsible Investing: What’s the Difference?

There are various terms for investing according to a certain set of values — including impact investing and socially responsible investing (SRI) — and not all of them refer to green investing strategies. Some terms may be used interchangeably, but there are some key differences to understand.

• Impact investing is a broad term that encompasses investors who seek measurable outcomes. Impact investing may or may not have anything to do with environmental or social factors.

• Socially responsible investing is also a broader label, typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.

• Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).

ESG Investing Standards

That said, there isn’t one universal set of criteria that define an ESG investment or an ESG index. Rather, each ESG index and corresponding index fund is typically based on proprietary metrics of qualitative and quantitative factors relating to environmental, social, and governance factors.

These metrics may be formulated internally by investment managers/research teams, based on metrics established by popularly accepted ESG frameworks, or a combination of both.

While it’s clear where the money’s been trending with regards to ESG investments, prudent investors should still remain selective when it comes to picking an ESG fund, as how these indexes are constructed can sometimes be based on opaque methodologies.

5 Commonly Used ESG Indexes

Following is an overview of five ESG indexes commonly used as benchmarks for some of the largest ESG index mutual funds.

1. S&P 500 ESG Index

The S&P 500 ESG Index consists of 307 domestic investments across the broader market. All firms included in the index must meet ESG criteria specified by S&P Dow Jones Indices.

ESG Criteria: According to S&P, the index uses an exclusionary methodology to filter out firms within the S&P 500 that partake in undesirable business activities, defined as follows:

• Firms operating within the thermo coal, tobacco, and controversial weapons industries.

• Companies that score within the bottom 5% of the United Nations Global Compact (UNGC).

• Companies that score within the bottom 25% of ESG scores within each global GICs industry group.

For more detailed information on the construction and constituents of this index, see the S&P 500 EDG methodology.

2. Nasdaq-100 ESG Index

The Nasdaq-100 ESG Index consists of securities from the Nasdaq 100 that meet ESG criteria established by Nasdaq and Morningstar Sustainalytics. The parent index includes 100 of the largest domestic and international non-financial firms that trade on the Nasdaq exchange.

ESG Criteria: Firms must meet a number of requirements to qualify under the index. These are determined by an exclusionary screening process by Nasdaq, that removes companies based on environmental, social, and good governance criteria.

The constituents of the Nasdaq-100 ESG Index are further refined by criteria developed by Morningstar Sustainalytics. These include a number of standards and metrics:

• ESG risk ratings

• Impact metrics

• Global standards screening

• Carbon emissions data

For details on all the criteria used to select companies in this index see the Nasdaq-100 ESG Index Methodology.

3. MSCI KLD 400 Social Index

Established in 1990, the MSCI KLD 400 Social Index is one of the oldest socially responsible investing (SRI) indexes, making it a popular standard for evaluating long-term ESG performance.

The KLD 400 Social index consists of 400 U.S. securities that meet the ESG standards set by the MSCI ESG Research team.

ESG Criteria: MSCI uses the following methodology to determine eligibility and inclusion within the index.

• Companies involved in nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, and adult entertainment are excluded.

• Must have an MSCI ESG rating above “BB.”

• Must have an MSCI Controversies score above “2.”

For more detail on the criteria used to select companies in this index, see the MSCI KLD 400 Social Index methodology.

4. MSCI USA Extended ESG Focus Index

The MSCI USA Extended ESG Focus Index selects constituents from the MSCI USA parent index using an optimization process that targets companies with high ESG ratings in each sector.

Companies that meet “business involvement criteria” in sectors such as tobacco, controversial weapons, producers of or ties to civilian firearms, thermal coal (and other fossil fuel companies), are excluded from the index.

The MSCI USA Index has 589 constituents while the MSCI USA Extended ESG Focus Index has around 284, which means an exclusion of about 52%.

For more detail on the criteria used to select companies in this index, see the MSCI USA Extended ESG Focus Index methodology.

5. FTSE US All Cap Choice Index

The FTSE U.S. All Cap Choice Index is part of the FTSE Global Choice Index Series, which is market-cap weighted. The index uses a rules-based methodology to exclude companies based on their involvement in business areas that could have a negative impact on the environment and/or society.

• Vice-related industries (e.g. alcohol, tobacco, gambling, adult entertainment)

• Non-renewable energy (e.g. fossil fuels, nuclear power)

• Weapons (conventional military weapons, controversial military weapons, civilian firearms)

• Companies are also excluded based on controversial conduct and diversity practices

For more details, please see the FTSE Global Choice Index series methodology.

ESG Investing Risks

As with all investments, the risks of choosing ESG-focused investments is that they may not necessarily outperform over your desired timeframe. There are also unique ESG risk factors to consider.

Diversification Risk

The primary risk of using an ESG-based strategy is the risk of underperformance and the risk of reduced diversification relative to cheaper, broader-market index funds.

This isn’t a surprise, as many of the top ESG indexes are market-cap (“capitalization”) weighted, which means that the largest firms in the index bear the greatest responsibility for changes in index values.

Given that some of the most popular ESG funds also track the performance of the broader-market indexes, this may make these particular funds less attractive as part of a diversified strategy.

Higher Costs

Another issue of concern is that some ESG funds charge higher fees and expense ratios relative to conventional funds.

While these fees aren’t necessarily head and shoulders above broader-market index funds, they can get progressively more expensive depending on how nuanced the fund’s investing strategy is. This is because ESG is a factor-based investment strategy which entails more complexity than traditional broader-market indexing.

Typically, the longer the time frame for comparison, the greater the risk for underperformance becomes, net of fees.

Inconsistency of ESG Standards

Perhaps the biggest drawback of ESG investing is the inconsistency around reporting, and the desire for more uniformity among which ESG frameworks are applied.

In other words, the ESG criteria established at one institution for their index or funds has little or no bearing on the ESG criteria employed by another firm.

Because sustainable investing has grown over the past decade, there has been an industry-wide movement towards greater consistency in ESG criteria and reporting. The Securities and Exchange Commission (SEC) has even recently undertaken efforts to codify aspects of financial reporting when it comes to ESG-related investments.

Nevertheless, these efforts remain in their early stages, and investors should continue to be discerning when it comes to picking ESG-linked investments.

Relevance of ESG Criteria

Existing ESG frameworks run the gamut when it comes to which metrics they choose to apply. For example, metrics related to carbon emissions may be relevant to heavy industry, but how relevant would those metrics be to the financial or technology sectors?

To address the issue of relevance, individual investors would do well to identify and assess when these solutions are applied.

Finally, expect to encounter data consistency issues when trying to quantify information that is naturally qualitative, particularly when management at each firm has wide discretion over how they choose to represent those metrics.

Benefits of ESG Investing

Some investors may be drawn to the potential advantages of ESG investing.

Investing With Values in Mind

Although it’s unclear whether ESG strategies make a tangible difference in the health of the environment, the well-being of society, or whether these strategies improve the quality of corporate governance, many investors appreciate the ability to invest in companies that espouse these values.

Moreover, as ESG strategies continue to expand, investors may choose from an even wider range of sustainable options that may align with their values: e.g., companies that support women, people of color, that focus on specific types of bio-techology, and so on.

Comparable Performance

As noted above, ESG strategies have come a long way in terms of assuaging investors’ fears of underperformance, or missing out on market returns.

While any strategy is subject to market volatility, and there are no guarantees of future performance, recent industry research suggests that ESG strategies perform comparably to conventional strategies over time.

Risk Management

Owing to the rise of climate-related disasters, worldwide viruses, and similar shared risk factors, companies must take new steps to protect themselves from these risks. Today, many ESG metrics take risk mitigation efforts into account.

The Takeaway

There’s no doubt that enthusiasm for ESG investing has grown over the past decade, and continues to gain traction. Understanding ESG indexes and how they apply sustainability rules and criteria to the companies in the index can help investors understand the corresponding index mutual funds and ETFs they may want to invest in.
Due to the sheer number of ESG-centric investments available to date, it’s a good idea to be selective when reviewing the underlying strategy of each fund, and understanding the underlying methodology of how each index constructs its portfolio.

Open an automated investing account and start investing for your future with as little as $50.

FAQ

What are the main components of ESG investments?

The main factors involved in ESG investing are how a company’s operations and products impact the environment (e.g., air, water, land, and other resources in the natural world); society (workers, community members, other stakeholders); and the overall governance of the company itself (e.g., its leadership, accounting practices, security measures).

How do ESG investments differ from traditional investments?

In order to be considered a type of ESG-focused investment, a company or security must meet certain standards in terms of the environment, society, and or its governance. These criteria are not generally applied to traditional or non-ESG securities.

Photo credit: iStock/StefaNikolic

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q424-107

Feb

2025

9 Types of Investments & Their Pros and Cons

By Pam O’Brien | Growing Wealth, Investing | No Comments

There are numerous different types of investments, ranging from stocks and bonds, to real estate and commodities. In tandem, these different types of investments can help investors build a diversified portfolio, and in effect, may help them reach their financial goals.

But having a solid understanding of the different types of investments is paramount, too, to creating and following through on an investment strategy. As such, you’ll want to at least have some baseline knowledge of each type — with that knowledge in-hand, you should hopefully be able to make financial decisions that align with your goals and strategy.

Key Points

• Investing in a variety of assets can help investors target financial goals and balance risk.

• Stocks, bonds, mutual funds, ETFs, annuities, derivatives, commodities, real estate, and private companies are common investment types.

• Each investment type offers unique benefits and drawbacks, such as stability or potentially higher returns in exchange for higher risk

• Diversification through different investments can protect against market volatility and enhance returns.

• Additional resources are available for in-depth learning about each investment type.

9 Common Types of Investments

Having different types of investments, as well as short-term vs. long-term investments can help you diversify your portfolio. All together, your portfolio should align with your financial or investment goals, and balance potential risks with potential returns — it isn’t easy, but it all starts with understanding what, exactly, you’re investing in. Here are some of the most common types of investments investors should know about.

1. Stocks

When you think of investing and investment types, you probably think of the stock market. A stock gives an investor fractional ownership of a public company in units known as shares.

Pros and Cons of Stock Investing

Here’s a brief rundown of the pros and cons of investing in stocks:

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Pros:

• If the stock goes up, you can sell it for a profit.

• Some stocks pay dividends to investors.

• Stocks tend to offer higher potential returns than bonds.

• Stocks are considered liquid assets, so you can typically sell them quickly if necessary.

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Cons:

• There are no guaranteed returns. For instance, the market could suddenly go down.

• The stock market can be volatile. Returns can vary widely from year to year.

• You typically need to hang onto stocks for longer time periods to see potential returns.

• You can lose a lot of money or get in over your head if you don’t do your research before investing.

Why Invest in Stocks?

Only publicly-traded companies trade on the stock market; private companies are privately owned. They can sometimes still be invested in, though the process isn’t always as easy and open to as many investors.

Further, investors may want to invest in stocks as stock can potentially make money in two ways: It could pay dividends if the company decides to pay out part of its profits to its shareholders, or an investor could sell the stock for more than they paid for it.

Some investors are looking for steady streams of income and therefore pick stocks because of their dividend payments. Others may look at value or growth stocks, companies that are trading below their true worth or those that are experiencing revenue or earnings gains at a faster pace.

2. Bonds

Bonds are essentially loans you make to a company or a government — federal or local — for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime. That stability is one reason many investors are interested in buying bonds, though it’s important to know they are not without risk.

Different Types of Bonds

Treasurys: These are bonds issued by the U.S. government. Treasurys (sometimes stylized as “Treasuries”) can have maturities that range from one-month to 30-years, but the 10-year note is considered a benchmark for the bond market as a whole.

Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.

Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest. High-yield bonds, also known as junk bonds, tend to have higher yields but lower credit ratings.

Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.

Zero-coupon bonds: Zero-coupon bonds may be issued by the U.S. Treasury, corporations, and state and local government agencies. These bonds don’t pay interest. Instead, investors buy them at a great discount from their face value, and when a bond matures, the investor receives the face value of the bond.

Pros and Cons of Bond Investing

Here’s a rundown of the pros and cons of bond investments:

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Pros:

• Bonds offer regular interest payments.

• Bonds tend to be lower risk than stocks.

• Treasurys are generally considered to be safe investments.

• High-yield bonds tend to pay higher returns and they have more consistent rates.

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Cons:

• The rate of returns with bonds tends to be much lower than it is with stocks.

• Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell.

• Bonds can decrease in value during periods of high interest rates.

• High-yield bonds are riskier and have a higher risk of default, and investors could potentially lose all the money they’ve invested in them.

Why Invest in Bonds?

When it comes to bonds vs. stocks, the former are typically backed by large companies or the full faith and credit of the government. Because of this, they’re often considered lower risk than stocks.

However, the risk of investing in bonds varies, and bonds are rated for their quality and credit-worthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be some of the least risky investments. Note, though, that they also tend to have lower returns.

3. Mutual Funds

A mutual fund is an investment managed by a professional. Funds often focus on an asset class, industry or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.

Index Funds

While mutual funds offer certain advantages to investors, those interested in a more passive approach may prefer index funds. Index funds are a form of passive investment, which means they’re not actively-managed, and instead, aim to track a market index, or portion of the market, such as the S&P 500 or something similar.

Pros and Cons of Investing in Mutual Funds

Here are some of the pros and cons of investing in mutual funds:

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Pros:

• Mutual funds are easy and convenient to buy.

• Since they offer portfolio diversification, they may carry less risk than individual stocks.

• A professional manager chooses the investments for you.

• You earn money when the assets in the mutual fund rise in value.

• There is potential dividend reinvestment, meaning dividends can be used to buy additional shares in the fund, which could help your investment grow.

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Cons:

• There is typically a minimum investment you need to make.

• Mutual funds typically require an annual fee called an expense ratio and some funds may also have sales charges.

• Trades are executed only once per day at the close of the market, which means you can’t buy or sell mutual funds in real time.

• The management team could be poor or make bad decisions.

• You will generally owe taxes on distributions from the fund.

Why Invest in Mutual Funds?

Investors may be interested in mutual funds because they offer a sort of out-of-the-box diversification, with exposure to many different types of securities or assets in one package. They’re also managed by a professional, which some investors may find attractive. On the other hand, they may have higher fees, and it’s always important to remember that past performance isn’t indicative of future performance, either.

4. ETFs

Exchange traded funds, or ETFs, are in some ways similar to a mutual fund, but there are key differences. One of the main differences is that ETFs can be traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. In addition, ETFs tend to be passive investments that track an underlying index. They also come in a range of asset mixes.

Pros and Cons of ETFs

Here’s a quick breakdown of the pros and cons of investing in ETFs:

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Pros:

• ETFs are easy to buy and sell on the stock market.

• They often have lower annual expense ratios (annual fees) than mutual funds.

• ETFs can help diversify your portfolio.

• They are more liquid than mutual funds.

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Cons:

• The ease of trading ETFs might tempt an investor to sell an investment they should hold onto.

• A brokerage may charge commission for ETF trades.This could be in addition to fund management fees.

• May provide a lower yield on asset gains (as opposed to investing directly in the asset).

Why Invest in ETFs?

ETFs may be an attractive choice for some investors because they may offer built-in diversification, tons of choices, and typically have lower costs or associated fees than similar products, such as mutual funds. But they’re also subject to many of the same risks as other investments.

5. Annuities

An annuity is an insurance contract that an individual purchases upfront and, in turn, receives set payments. There are fixed annuities, which guarantee a set payment, and variable annuities, which put people’s payments into investment options and pay out down the road at set intervals. There are also immediate annuities that begin making regular payments to investors right away. (Note that SoFi Invest does not offer annuities to its members.)

Pros and Cons of Investing in Annuities

Here are some of the pros and cons of annuity investments:

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Pros:

• Annuities are generally low risk investments.

• They offer regular payments.

• Some types offer guaranteed rates of return.

• May provide a supplemental investment for retirement.

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Cons:

• Annuities typically offer lower returns compared to stocks and bonds.

• They typically have high fees.

• Annuities can be complex and difficult to understand.

• It can be challenging to get out of an annuities contract.

Why Invest in Annuities?

Investors may like that there are so many different types of annuities to invest in, and the fact that they can offer guaranteed and predictable payments, tax-deferred growth, and low-stress management. However, they do often have lower interest payments compared to bonds, there can be penalties for early withdrawals, and associated fees.

6. Derivatives

There are several types of derivatives, but two popular ones are futures and options. Futures contracts are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.

Meanwhile, in options trading, buyers have the right, but not the obligation, to buy or sell an asset at a set price. A derivatives trading guide can be helpful to learn more about how these investments work.

Pros and Cons of Options Trading

Here are some of the pros and cons to derivative investments:

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Pros:

• Derivatives allow investors to lock in a price on a security or commodity.

• They can be helpful for mitigating risk with certain assets.

• They have the potential to provide returns when an investor sells them.

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Cons:

• Derivatives can be very risky and are best left to traders who have experience with them.

• Trading derivatives is very complex.

• Because they expire on a certain date, the timing might not work in your favor.

Why Investors Trade Options

Trading options is a fairly high-level investment activity — it’s not for everyone. There can be significant risks, and options trading strategies can be complex. That said, trading options has the potential to be profitable for experienced investors.

7. Commodities

A commodity is a raw material — such as oil, gold, corn, or coffee. Trading commodities has a reputation for being risky and volatile. That’s because they’re heavily driven by supply and demand forces. Say for instance, there’s a bad harvest of coffee beans one year. That might help push up prices. But on the other hand, if a country discovers a major oil field, that could dramatically depress prices of the fuel.

Pros and Cons of Commodity Trading

Here are some pros and cons of commodity trading:

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Pros:

• Commodities can diversify an investor’s portfolio.

• Commodities tend to be more protected from the volatility of the stock market than stocks and bonds.

• Prices of commodities are driven by supply and demand instead of the market, which can make them more resilient.

• Investing in commodities can help hedge against inflation because commodities prices tend to rise when consumer prices do.

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Cons:

• Commodities are considered high-risk investments because the commodities market can fluctuate based on factors like the weather. Prices could plummet suddenly.

• Commodities trading is often best left to investors experienced in trading in them.

• Commodities offer no dividends.

• An investor could end up having to take physical possession of a commodity if they don’t close out the position, and/or having to sell it.

Why Invest in Commodities?

Investors have several ways they can gain exposure to commodities. They can directly hold the physical commodity, although this option is very rare for individual investors (Imagine having to store barrels and barrels of oil).

So, many investors wager on commodity markets via derivatives — financial contracts whose prices are tied to the underlying raw material. For instance, instead of buying physical bars of precious metals to invest in them, a trader might use futures contracts to make speculative trades on gold or silver. Another way that retail investors may get exposure to commodities is through exchanged-traded funds (ETFs) that track prices of raw materials.

That said, there are risks associated with commodities trading, and investors may want to ensure that it aligns with their investment strategy and goals before getting started.

8. Real Estate

Owning real estate, either directly or as part of real estate investment trust (REIT) investing or limited partnerships, gives you a tangible asset that may increase in value over time. If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.

Pros and Cons of Investing in Real Estate

Consider these pros and cons of investing in real estate (REITs, in particular):

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Pros:

• Real estate is a tangible asset that tends to appreciate in value.

• There are typically tax deductions and benefits, depending on what you own.

• Investing in real estate, such as through a REIT, can help diversify your portfolio.

• By law, REITs must pay 90% of their income in dividends.

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Cons:

• Real estate is typically illiquid, although REIT investments offer more liquidity than property.

• There are constant ongoing expenses and work needed to maintain a property.

• REITs are generally very sensitive to changes in interest rates, especially rising rates.

• With a REIT, dividends are taxed at a rate that’s usually higher than the rate for many other investments.

Why Invest in Real Estate?

Investing in real estate may help diversify a portfolio, generate recurring cash flow (from rent, or dividends), or enable ownership of a tangible asset that may increase in value over time. However, investments may be subject to changes in the real estate market, such as rising and falling interest rates and regulatory changes, and are often better suited for longer-term investments.

9. Private Companies

Only public companies sell shares of stock, however private companies do also look for investment at times — it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.

Pros and Cons of Investing in Private Companies

Here are some pros and cons of investing in private companies:

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Pros:

• Potential for good returns on your investment.

• Lets investors get in early with promising startups and/or innovative technology or products.

• Investing in private companies can help diversify your portfolio.

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Cons:

• You could lose your money if the company fails.

• The value of your shares in the company could be reduced if the company issues new shares or chooses to raise additional capital. Your shares may then be worth less (this is known as dilution).

• Investing in a private company is illiquid, and it can be very difficult to sell your assets.

• Dividends are rarely paid by private companies.

• There could be potential for fraud since private company investment tends to be less regulated than other investments.

Tips for Investing in IPOs

Investing in companies that are going public for the first time via an IPO can be attractive to investors who think the company has potential — IPO investing is fairly popular, but can be risky. With that in mind, if you do want to invest in companies going public, you’ll want to do your homework, and review filings and disclosures the company has filed with regulators, and anything else you might come across that could help inform your decision.

And remember, too, that IPO investing is generally considered high risk – a hot new stock can lose steam just as easily as it can gain it.

Investment Account Options

An investor can put money into different types of investment accounts, each with their own benefits. The type of account can impact what kinds of returns an investor sees, as well as when and how they can withdraw their money.

401(k)

A 401(k) plan is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.

Pros and Cons of 401(k)s

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Pros:

• Contributions you make to a 401(k) can reduce your taxable income. The money is not taxed until you withdraw it when you retire.

• Contributions can be automatically deducted from your paycheck.

• Your employer may provide matching funds up to a certain limit.

• You can roll over a 401(k) if you leave your job.

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Cons:

• There is a cap on how much you can contribute each year.

• Most withdrawals before age 59 ½ will incur a 10% penalty.

• You must take required minimum distributions (RMDs) from traditional 401(k) plans when you reach a certain age. (Roth 401(k)s are not subject to RMDs during the account holder’s lifetime.)

• You may have limited investment options.

IRA

IRA stands for “individual retirement account” — so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money for retirement without needing an employer-backed 401(k).

With a traditional IRA, individuals contribute pre-tax dollars to the account, up to the annual limit. Those contributions are tax-deferred, meaning you don’t need to pay taxes on those funds (and their earnings) until they’re withdrawn in retirement. With a Roth IRA, however, you can contribute after-tax dollars up to the annual limit. Those funds and their earnings are not subject to taxes when qualified withdrawals are made.

Pros and Cons of IRAs

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Pros:

• IRA accounts are tax advantaged: Earnings grow tax-deferred for traditional IRAs and tax-free free for Roth IRAs.

• You can choose how the money is invested, giving you more control.

• Those aged 50 and over can contribute an extra $1,000 in catch-up contributions.

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Cons:

• Relatively low annual contribution limits ($7,000 in both 2024 and 2025).

• There is a 10% penalty for most early withdrawals before age 59 ½.

Brokerage Accounts

A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, ETFs. Some brokerage firms charge fees on the trades you make, while others offer free trading but send your orders to third parties to execute — a practice known as payment for order flow. Investors can be taxed on any realized gains.

You might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.

There are even a number of investment options out there not listed here — like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business.

Pros and Cons of Brokerage Accounts

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Pros:

• Offer flexibility to invest in a wide range of assets.

• Brokerage accounts provide the potential for growth, depending on your investments. However, all investments come with risks that include the potential for loss.

• You can contribute as much as you like to a brokerage account.

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Cons:

• You must pay taxes on your investment income and capital gains in the year they are received.

• Investments in brokerage accounts are not tax deductible.

• There is a risk that you could lose the money you invested.

The Takeaway

It might still seem overwhelming to figure out what kinds of investments will help you achieve your goals. There are different investment strategies and finding the right one can depend on where you are in your career, what your financial goals are and how far away retirement is. Options such as index funds and ETFs may help provide immediate diversification, while a financial professional can help advise you on how you might build your portfolio so that it aligns with your objectives.

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

What is the most common investment type?

Stocks are one of the most common and well-known types of investments. A stock gives an investor fractional ownership of a public company in units known as shares.

How do I decide when to invest?

Some prime times to start investing include when you have a retirement fund at work that you can contribute to and that your employer may contribute matching funds to (up to a certain amount); you have an emergency fund of three to six months’ worth of money already set aside and you have additional money to invest for your future; there are financial goals you’re ready to save up for, such as buying a house, saving for your kids’ college funds, or investing for retirement. Please remember you need to consider your investment objectives and risk tolerance when deciding the “right” time to start investing.

Should I use multiple investment types?

Yes. It’s wise to diversify your portfolio. That way, you’ll have different types of assets which will increase the chances that some of them will do well even when others don’t. This will also help reduce your risk of losing money on one single type of investment. In short, having a diverse mix of assets helps you balance risk with return. However, diversification does not eliminate all risk.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

SOIN-Q424-097

What is Greenwashing? Definition, Types & Examples

Types of Greenwashing

Example of Greenwashing

The Negative Impacts of Greenwashing

The Impact on Consumers

The Impact on the Environment

The Impact on Investors

How to Spot Greenwashing

How to Avoid Greenwashing

1. Look for Clear and Transparent Language

2. Evaluate the Data

3. Compare Similar Products

4. Look Beyond the Final Product

5. Look for Goals and Timelines

6. Verify Ingredients and Materials

Greenwashing vs. Green Marketing

How to Recognize Green Marketing

Greenwashing Regulations

The Takeaway

FAQ

What is ESG greenwashing?

What are the three most common kinds of greenwashing?

What is the role of regulations in combatting greenwashing?

Investing in Alcohol Stocks

Overview of the Alcohol Industry

A Broad Sector

Alcohol-Related Investments

Consumer Staple or Luxury Goods?

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

Types of Alcohol Stocks

Large Multinational Corporations

Craft Breweries and Distilleries

Alcohol Distribution Companies

Factors Influencing Alcohol Stocks

Economic Impacts

Consumer Trends

Pros of Investing in Alcohol Stocks

Steady Consumption

Brand Loyalty and Pricing Power

Potential for Growth in Emerging Markets

Cons and Risks

Regulatory and Legal Challenges

Changing Consumer Preferences

Competition and Market Saturation

Top Alcohol Stocks to Consider

How to Invest in Alcohol Stocks

Direct Stock Purchase

ETFs and Mutual Funds Focused on Alcohol

Analyzing Alcohol Stocks

Ethical Considerations

The Takeaway

FAQ

How do economic downturns typically affect alcohol stocks?

What are the main subsectors within the alcohol industry for investors?

How do changing consumer preferences impact alcohol stock performance?

What Is the Dow Jones?

What Is the Dow Jones Industrial Average?

What Makes the Dow Jones Industrial Average Different?

Example of How Stock Price Can Skew an Index

The Dow Divisor

How the Dow Jones Industrial Average Changed Over Time

The Dow Jones Industrial Average in the 20th Century

The Takeaway

What Is an ESG Index? 5 ESG Indexes to Know

What Are ESG Indexes?

Reason for ESG Indexes

ESG Criteria Explained

Environmental Factors

Social Factors

Governance Factors

Mixed Growth in the ESG Sector

ESG vs Socially Responsible Investing: What’s the Difference?

ESG Investing Standards

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5 Commonly Used ESG Indexes

1. S&P 500 ESG Index

2. Nasdaq-100 ESG Index

3. MSCI KLD 400 Social Index