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Among the more recent developments in the ETF industry have been Green, Alternative and SRI (socially responsible investing) ETFs, giving investors yet more choices to create a very selective investment portfolio. The latest gimmick in this space are faith-based ETFs. Under the umbrella of issuer FaithShares, 5 new ETFs have been created allowing you to put a religious touch on investing. You can now invest in Baptist Values (FZB), Catholic Values (FCV), Christian Values (FOC), Lutheran Values (FKL) or Methodist Values (FMV).

I don’t mean to question or criticize religion and faith-based life and investment decisions in any way, nor do I wish to belittle any of the newer and more complex ETFs. They would not have been created if there wasn’t any investor demand. Instead, my caveat, as with any new financial product or service is of a more general nature and very simply states: Know what you’re buying!

For starters, one can read the prospectus but that is typically nothing but an accumulation of 'legaleeze'. Most non-lawyers get dizzy and are left more confused about the true nature of the fund. At the same time, the typical labels and brief fund profiles are not adequate in describing the potential risks and investment policies either. My first glance therefore goes to the fund holdings. Those often reflect the true nature of the fund’s investment objectives better and clearer. According to the brief description of FCV:

The FaithShares Catholic Values Fund investment objective is to track the performance, before fees and expenses, of the FaithShares Catholic Values Index, a custom index by FTSE/KLD.”

On closer look however, the Fund manager selects only 100 stocks from the pool of the 400 pre-screened companies of the FTSE/KLD Index that meet their “Catholic” value metrics. Examining the Top 10 Holdings of the FaithShares Catholic Values ETF (see table below), the inquiring mind is curious as to what kind of investment, asset or company, could be in line with a “Catholic” values?

click to enlarge

Data as of March 3, 2010 Source: www.faithshares.com

What makes large international companies like Starbucks (SBUX) or American Express (AXP) faith-based organizations? Dig a little deeper and you learn that the metrics are not active but rather passive screens. That means if a company has no declared position e.g. on abortion, it could theoretically meet one of the criteria of Catholic values. There are many other metrics which filter through the original pool of 400 pre-screened companies, many of which probably elude my understanding. Notwithstanding these screening methods, there are other considerations you should take into account including your own risk profile, true correlation to the underlying index as well as liquidity concerns for some of the smaller funds. For instance, the total market value of FCV as of today is only about $2.6M, hardly a liquid fund by any measure.

Lastly, please note that per website info:

FaithShares Advisors, LLC, the Fund's advisor, has committed to donating 10% of the net income derived from each Fund back to a ministry or charity supported by that Fund's denomination.”

This is very noble indeed and presumably a major factor in considering faith based ETFs in the first place. But as with any new investment product, you should do your homework and try to understand how these new ETFs operate rather than listening to a sales pitch from your broker. If in doubt, contact the fund directly, they usually have staff available to answer investor questions.

Alternatively, you could simply invest in a low-cost index fund and donate to your preferred charities directly. It could net your charity an extra 0.85%, the amount that you would have otherwise paid in annual fees...

Disclosure: No positions

Source: Investing in FaithShares ETFs Requires a Serious Leap of Faith