Socially responsible investing is nothing new on Wall Street. Funds that avoid anything related to alcohol, tobacco, weapons and other such unappetizing investments have been around for years although very few have really gained any significant traction in the marketplace. The Calvert Equity Fund (MUTF:CSIEX) is perhaps the biggest success story with assets of over $2 billion. The Domini Social Equity Fund (MUTF:DSEFX) has been around for 25 years and manages nearly $1 billion. In the ETF space, there's the iShares MSCI USA ESG Select Fund (NYSEARCA:KLD).
A new ETF has just entered the social investing fray and it's being brought to the market by ETF innovator Global X. The Global X S&P 500 Catholic Values ETF (NASDAQ:CATH) was launched earlier this month with the goal of adhering to the investing guidelines set forth by United States Conference of Catholic Bishops. While the full mandate is far too long to add here, the general principles include "protecting human life; promoting human dignity; reducing arms production; pursuing economic justice; protecting the environment, and encouraging corporate responsibility." This means eliminating companies engaged in activities such as weapons production, gambling, abortion, stem cell research, sweatshop labor and racial or gender discrimination.
While the fund admirably attempts to provide another option for those investors who wish to adhere to socially responsible investing principles, the Catholic Values ETF at its core is essentially just an S&P 500 index fund.
The fund uses the S&P 500 as its starting point. Once it eliminates companies that don't meet the Catholic investing guidelines, the fund is down to 469 holdings. With so few components of the index being eliminated, correlation with the SPDR S&P 500 ETF (NYSEARCA:SPY) will remain very high. Moreover, the fund then attempts to minimize tracking error with the S&P 500 by matching the sector weightings of the index. This step essentially takes a portfolio that is already closely correlated to the S&P 500 and pulls it in even closer.
Perhaps the most disappointing thing about the fund is its expense ratio. At 0.29%, the fund carries an expense ratio triple that of the SPDR S&P 500 ETF. Given that this fund is going to mirror the index, for the most part, it probably makes more sense to just buy the index and keep the extra 20 basis points a year in your own pocket.
Like most new ETFs lately, this fund serves a very specific niche. The name says "Catholic Values ETF" but it's probably appealing to just about anyone that wishes to engage in socially responsible investing or follow the guidelines established by the U.S.C.C.B. These folks may find this product appealing but everybody else will probably be better off in an S&P 500 index fund.
The sector allocation will be the same and the composition of the portfolio will be nearly identical. The target audience for this ETF is very narrow which means that it will likely have trouble growing its asset base significantly. Those not in the target audience for this fund will likely just want to stick with the lower-cost index fund.
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