Mixing religious beliefs within the context of your investment decisions is a difficult barrier for many people to cross. These core tenets are always lurking beneath the surface of how we view the world and lead our everyday lives. However, they are typically reduced to a lesser role as the overriding influences of compounding, fees, and performance dominate our stock market focus.
Furthermore, different religions of the world value different morals and ethics. So how do you identify which traits are suitable for each group?
One option to consider is a socially responsible focus. There have been several forays into the world of socially responsible investing that attempt to hone in on stocks with favorable labor policies, green products, or prominent gender equality efforts. The iShares MSCI KLD 400 Social ETF (NYSEARCA:DSI) and iShares MSCI USA ESG Select ETF (NYSEARCA:KLD) are two examples of these types of funds.
The Global X family of ETFs has opted to take this effort one step further for those who follow the Catholic religion. The S&P 500 Catholic Values ETF (NASDAQ:CATH) concentrates solely on companies within the S&P 500 Index whose business practices meet the socially responsible investment guidelines of the Catholic Church.
When I first heard about this ETF, I figured it had to be a new gimmicky fund that sought out a small basket of esoteric stocks with a religious affiliation. We've seen plenty of niche ETFs come to the market in recent years and many of them have eyebrow raising investment mandates. However, I was pleasantly surprised to discover my initial conclusion was incorrect. Under the surface, this ETF takes a sensible approach to its portfolio construction methodology - and full disclosure: I'm not Catholic and have no bias towards this concept.
Let's dive into the details…
The CATH portfolio essentially starts with the traditional S&P 500 Index and then systematically excludes companies that are engaged in the production of weapons, military sales, or have been implicated in employing child labor in their supply chains. They also seek to eliminate companies focused on stem cell research, contraceptives, and adult entertainment.
According to the initial fact sheet, this leaves 469 holdings in the CATH portfolio at its inception. The good news is that this criteria only excludes a small subset of companies. This means that its performance will likely still track closely with the benchmark S&P 500 Index and is broad enough to be considered a core holding for the majority of investors.
Furthermore, the index that CATH is based on has taken the added step of re-weighting the remaining positions so that the original sector allocations of the traditional S&P 500 Index are preserved. This will again contribute to minimal tracking error as the constituents are re-balanced and evaluated quarterly.
Lastly, the CATH fund has opted to set its net expense ratio at 0.29%. This is significantly lower than the 0.50% expense employed by DSI and KLD. It represents a more reasonable management fee for what is essentially a passively managed portfolio.
The Bottom Line
In my opinion, the two strongest arguments to own CATH for those who wish to invest through their religious beliefs are its broadly diversified qualities and reasonable expense ratio. Too often, ETF investors go seeking for a niche strategy at a premium expense, only to see it underperform their expectations during an adverse market cycle.
From an industry standpoint, I'm interested to see how this fund is received by ETF investors and whether it has the necessary characteristics to grow its asset base. Only time will tell if this ETF can convert believers to its cause.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.