Socially Responsible ETF Investing

 |  Includes: DSI, EWP, GAF, KLD
by: Carl T. Delfeld

Do we need an exchange-traded fund for Africa? Why would anyone want to invest in Africa with its high levels of poverty, corruption and bureaucratic roadblocks? Nicholas Vardy notes that between 1995 and 2005, African stocks showed compound annual growth of 22%. Last year, the stock market in Kenya rallied 46%, and the local index is up 9x in dollar terms over the past ten years. In 2006, equities in Morocco were up 75%, 69% in Uganda, and 55% in Botswana. Nigeria's stock market's capitalization has doubled over the 12 months to about $45 billion.

Then there is the China factor. The Chinese leadership has targeted China as a region where there is a great power vacuum they wish to fill not to mention ample natural resources to fuel its 10% plus economic growth. Trade between China and Africa soared 40% to a record $55.5 billion last year. Direct investment has reached a cumulative $6.5 billion and a third of Chinese oil now comes from Africa.

Nigeria has been doing particularly well with a GDP that more than doubled between 2003 and 2006 and thanks to strong oil exports has foreign exchange reserves of just under $50 billion. These markets are, of course, rather thin making an ETF problematic but don't be surprised to see an African ETF in the next year or two.

The Spain exchange-traded fund (NYSEARCA:EWP) has been a superstar with its economy growing for fourteen straight years but its stock market stumbled a bit last week losing 3% of its value. Some are questioning whether its best days are behind it as construction and property markets cool a bit. But many Spanish firms like Santander, a huge banking group, and Ferrovial, a construction giant, have spent billions buying foreign businesses. The Economist highlights that much of this expansion overseas has been financed with large borrowings leading to a rising level of corporate debt.

The Spanish economy is a mix of world class companies, huge inflows of tourists but little domestic manufacturing and overall poor productivity. Can the boom continue and will it hit a speed bump or slow down in a manageable way as overheated property markets in both Australia and the UK have evolved. In addition, younger people in Spain are oozing with confidence in part due to sharp improvements in education. Spain in some ways resembles a bit the Irish economic revolution which transformed Ireland from the basket case of Europe to a current per capita income higher than the UK.

It is a shame that we don't have a Norway exchange-traded fund since the country and its stock market is riding the energy boom and in the process having built up a $300 billion in reserves. Not bad for a population of only 9 million. The Norwegian Government Pension Fund is getting attention as the New York Times describes its "ethically responsible approach" in allocating this monster nest egg.

On its black list are blue chip companies like Wal Mart (NYSE:WMT), General Dynamics (NYSE:GD), Lockheed (NYSE:LMT), Raytheon (NYSE:RTN), Honeywell (NYSE:HON), Boeing (NYSE:BA) and United Technologies (NYSE:UTX). Most of these companies are excluded due to charges of unfair labor practices or weapons manufacture.

You can also use an exchange-traded fund to invest in what is being referred to as a socially responsible way. The iShares KLD Select Social (NYSEARCA:KLD) - holds 218 companies in the Russell 1000 and S&P 500 which have the highest social and environmental scores and exclude only tobacco companies while the iShares KLD 400 Social (NYSEARCA:DSI) tries to give total exposure to companies that have positive environmental, social and corporate governance policies.