Socially Responsible and Green Investing: Is It Better to Make a Statement or Make Money?

by: Mike Havrilla

Index Universe reported last week that Pax World filed with the SEC to launch three socially responsible investing (SRI) exchange-traded funds:

sShares KLD North America Sustainability Index ETF
sShares KLD Europe Asia Pacific Sustainability Index ETF
sShares FTSE Environmental Technologies Index ETF

These three would compete with two existing SRI-based ETFs, including iShares KLD Select Social Index (NYSEARCA:KLD) and iShares KLD 400 Social Index Fund (NYSEARCA:DSI). DSI is down 36.6% in the past year while KLD fared slightly worse with a loss of 37.3%. As illustrated on the accompanying chart (click to enlarge), there is a very high degree of correlation for the DSI, KLD, and the S&P 500 Index – which are nearly indistinguishable on the one-year chart. The trailing 12-month yield for KLD is 2.3%, slightly higher than DSI at 1.9%, but below the S&P 500 SPDR yield of 3.1%.

The website for KLD shows a respectable level of net assets at $93M with Top 5 stock holdings that include Johnson & Johnson (NYSE:JNJ) (5.9%), IBM (NYSE:IBM) (3%), Heinz (HNZ) (3%), Microsoft (NASDAQ:MSFT) (2.7%), and Hewlett-Packard (NYSE:HPQ) (2.6%). The total number of securities held by KLD is 218 and the fund has double digit concentrations of 19.2% in tech, 18.4% in healthcare, 18.1% in consumer goods, and 12.3% in financials.

The website for DSI reveals net assets of $59M with Top 5 stock holdings that include Procter & Gamble (NYSE:PG) (4.5%), JNJ (4.1%), MSFT (3.7%), IBM (2.8%), and JP Morgan (NYSE:JPM) (2.8%). DSI holds a total of 401 securities, with double digit concentrations of 22.4% in information technology, 16.5% in consumer staples, 15.9% each in financials + healthcare, and 11% in consumer discretionary.

The launch of another investment vehicle, AirShares (ASO), for carbon credits this past week to compete with iPath Global Carbon ETN (NYSEARCA:GRN) is consistent with the trend of SRI applied to the market for exchange-traded products. I have also identified 19 companies for inclusion in a Global Carbon Credit Trading Index, which is mostly made up of companies that are big on hope and promises but short on revenue and profits – other than the larger, established companies in the index with real operations that generate carbon credits on the side such as Waste Management (WMI) and CNX Gas (CXG).

The SRI and green investing themes are fine if you are looking to make a statement with your investments. However, I would prefer to make money and have no problem investing in Altria (NYSE:MO) with a dividend yield over 8%, even though I have never smoked and would not encourage others to do so. Also, I hope that coal companies are not forced out of business due to the widespread adoption of carbon credits in the U.S., which amounts to a penalty for a major source of our nation's power grid that is cheap, abundant, and does not come from the Mid-East.

Given the expense ratio of 0.5% each for KLD and DSI; one could achieve nearly identical results with SPY at a fraction of the cost (0.08%) or do much better than the overall market with a specialty ETF such as iShares Nasdaq Biotech (NASDAQ:IBB) at about the same expense ratio (0.48%). The even higher expense ratios of 0.85% for ASO and 0.75% for GRN are another negative factor in addition to the massive declines in crude oil and other energy commodities in the past year which threatens the funding and viability of many renewable energy companies and the entire concept of carbon credits.

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