Why Socially Responsible ETFs Haven't Taken Off (KLD, PBW)

A recent article in Institutional Investor discussed the seeming lack of interest in socially responsible ETFs -- specifically, the iShares KLD Select Social Index (KLD). The KLD index is based on the Russell 1000 index, with tobacco companies excluded. The index methodology then optimization scheme to favor socially responsible companies while not having more than 2% tracking error to the Russell 1000 index:

Looking at the fund's performance over the past year, KLD's quantitative strategy has been quite successful at matching the benchmark index. The very low trading volume relative to the number of KLD shares outstanding can easily be explained by most owners of KLD being buy-and-hold types rather than active traders. SDY also has ridiculously low volume relative to size for the same reason.

I think the main reason for lack of interest in socially responsible funds is that most investors agree with economist Milton Freedman that the social responsibility of business is to increase its profits. Indeed according to Prof. Jeremy Siegel, Ben Bernanke's Favorite Stock is Altria (MO) (f.k.a. Phillip Morris).

Socially responsible investing suffers from socially desirability bias -- the tendency for people to claim things about themselves which are socially desirable. A classic example is flossing your teeth -- most people, when asked, will claim that they do floss their teeth, even though in reality regular flossing is quite rare.

The article notes that:

according to Calvert, more than half of all non-SRI investors are “interested

Comments

[hugh giblin:]

This is the same old arrogant, self-serving, unethical argument Wall Street types have been throwing up (a good metaphor) against SRI
funds since they started. SRI now has 2.71 Trillion dollars in investments and is growing rapidly. 20 studies show they perform as well as conventional funds. There are more corporate consciences out there who are smart enough to realize that the trend is toward good corporate governance and ethical practices and not just profit for shareholders. The investing public is becoming more and more aware of SRI especially through the global warming
experience.

If you don't care how you make your money either directly or indirectly you are effectively amoral.

2008 Apr 17 10:47 PM