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ETF In Focus: IShares MSCI Select Socially Responsible ETF (KLD)

|Includes: AAPL, GOOG, JNJ, iShares MSCI USA ESG Select ETF (KLD), MCD, MSFT

Investors in search of socially responsible investment options have several choices, one of which is the iShares MSCI Select Socially Responsible ETF (NYSEARCA:KLD), but these funds have underperformed because their focus is not on generating the highest returns possible. For example, most, if not nearly all of these funds, do not hold tobacco stocks, which have outperformed the market by a wide margin at times. They also may select areas of the market that are not as profitable on the basis of being socially responsible.

There are many ways to be socially responsible as well. KLD seeks out companies with positive social, environmental and governance characteristics relative to their peers. Catholic and Muslim funds, meanwhile, adhere to different definitions of social responsibility. Once one leaves the realm of investing based on risk and return and seeks a different kind of "value" investing, there are actually a lot of options. Unless you agree with all of the values of the fund, it makes more sense to earn the highest return possible and then donate money to your favorite charities. Companies such as Apple (NASDAQ:AAPL), McDonald's (NYSE:MCD) and Google (NASDAQ:GOOG) have all been criticized for being irresponsible in one way or another.

Generally speaking, companies that are socially responsible to the point of not engaging in criminal or brand destructive behavior should outperform, but once one gets beyond corporate governance, there's little evidence that social concern affects investment performance. In fact, at certain points, socially responsible funds have been bested by vice funds that load themselves up with gambling, tobacco, pornography, alcohol and firearms companies. Ironically, being socially irresponsible can have benefits for investors, since each time a firm courts public criticism, it's stock may fall, providing great entry points for investors focused on return.

In the end, KLD's performance hasn't justified its investment strategy. Unless an investor is willing to accept lower returns to satisfy their values, there isn't much use for KLD in their portfolio. KLD also won't kill your portfolio, but it won't deliver any measurable out-performance. Furthermore, it's unlikely that the portfolio of 133 holdings is going to completely mesh with an individual's values. If you're serious about not owning companies that work against your values, it makes more sense to pick stocks individually, or find a very targeted fund such as a fund focused on environmentally responsible companies.

There is also a fund similar to KLD, iShares MSCI Socially Responsible ETF (NYSEARCA:DSI), which is filled with megacap names like Microsoft (NASDAQ:MSFT) and Johnson & Johnson (NYSE:JNJ). DSI has actually tracked SPDR S&P 500 (NYSEARCA:SPY) closely, but that's more due to how similar the holdings are than due to strategy.

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Historical Performance (as of 5/27/13)



1 year

3 years (Annualized)

5 years(Annualized)






S&P 500 TR





Large Blend





Past performance is no assurance of future results.

Volume, Assets, and Expenses

KLD has an average trading volume of 9 thousand shares per day and $215 million in assets under management. It has an expense ratio of 0.50%.

(Sources: Morningstar,

ETF Report's Power Rankings

Power Index: 70

Power Trend: +

(Sources: Morningstar,

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: No representation is made that any account will or is likely to achieve profits or losses similar to those shown, and there are frequently significant differences between hypothetical performance results subsequently achieved by following a particular strategy. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. All investments involve risk including loss of principal. Please read all disclosures before investing.