A Guide To Socially Responsible And Faith-Based ETFs

by: SA Editors

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.

Further Reading

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.

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