What Are They?
- Socially responsible and faith-based ETFs are for investors who want their investment portfolio to be selected based on a strong extra-financial belief system or moral code. They are willing to forgo profits for the sake of upholding their belief system within their investments.
- "Socially responsible" ETFs hold shares of companies that have positive environmental, social, political or corporate governance policies. They may avoid stocks in certain industries, such as tobacco or gambling stocks, or stocks of companies that operate in certain countries, such as Sudan.
- Faith-Based ETFs hold shares of companies whose values are in line with the values of the religion they represent. For the Javelin Islamic Fund listed above, this means alcohol, interest-collecting financial services (due to the Muslim prohibition against usury), casinos, firearms, and pork companies are screened out of the portfolio. For the FaithShares Christian funds above, religious screens are applied in order to eliminate tobacco, gambling, alcohol, weapons manufacturing and pornography companies.
Why and How To Use Them
- Socially responsible and faith-based ETFs may be broad enough to use as a core US stock fund in a portfolio. The iShares KLD 400 Social Index Fund (NYSEARCA:DSI), for example, can be viewed as an alternative to the S&P 500 for investors who don't want to hold "unethical" stocks, or who think that the stocks of socially responsible companies will outperform in the long term. The same holds for the various faith-based ETFs, which generally start with a sample of the largest 400-500 U.S. companies by market cap and eliminate those they view as morally objectionable.
What to Look Out For
- Socially responsible and faith-based ETFs may be challenging to include in a diversified portfolio as they intentionally leave out many sectors. They will likely overlap with other broad-based ETFs. Also, the lack of mid cap and small cap companies included in these funds limits exposure to key market segments.
- Socially responsible ETFs tend to have higher expense ratios than broader US index ETFs. Check the annual expense ratios before you buy if costs are a major concern.
- Articles about socially responsible investing: Should One Invest in Unethical Companies? (Chad Brand), Socially Responsible Investing (Tom Coyne), Socially Responsible ETF Investing (Carl Delfeld), Why Socially Responsible ETFs Haven't Taken Off (Market Participant).
- Articles about faith-based ETFs: JVS: First Islamic ETF Comes to Market (Patrick Watson), Sharia-Compliant ETFs: The First of Many? (Michael Johnston), ETFs Find Jesus: FaithShares Launches Three Christian Values ETFs (Eric Dutram), Five Flavors of Faith in ETF Format (Ron Rowland).
- Articles discussing these ETFs: Does KLD's New SRI Dividend Fund Make the Cut? (Matt Hougan), Claymore Launches New High Income and Sudan Free ETFs (Tom Lydon).
- For a critique of narrow theme ETFs, see William Bernstein's Who Needs 'Em? The List of Obscure ETFs Grows.
- Narrow sector and theme ETFs tend to have higher expenses and spreads than broader index ETFs. See Matt Hougan's Watch Expenses & Spreads For HealthShares, PowerShares, WisdomTree ETFs.
- It's generally agreed that expenses have a significant impact on long-run returns. However, Michael Krause argues that ETF Fees Are Largely Irrelevant and Roger Nusbaum agrees.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.