Increasingly, people are choosing to put their money where their values are, and that sentiment isn't lost on money managers. Just this week, the first of three exchange-traded funds targeted at Christian investors hit the market. Two more will launch next week.
The securities held in each of the funds, FaithShares Catholic Values Fund , FaithShares Methodist Value Fund and FaithShares Christian Values Fund, are tailored to each denomination's teachings and recommendations for investing. FaithShares Advisors worked with the FTSE Group and KLD Research & Analytics, a provider of environmental, social and governance research and indexes, to create the series of custom indexes on which the funds are based.
Each fund has about 100 stocks, mostly household names like Microsoft (MSFT), Google (GOOG) and Starbucks (SBUX). What you won't find in them are companies that earn their profits from alcohol, tobacco, gambling, pornography or weapons -- the so-called "sin stocks." A secondary screening takes into account companies' social, environmental and governance practices.
Was it divine inspiration that lead to the creation of the FaithShares funds? "For the last 20 years, I've worked with faith-based organizations and foundations, and there always seemed to be a tug of war between them wanting to make money and doing so from objectionable industries," explains Thompson S. Phillips, Jr., president of FaithShares Advisors. "Garrett [CEO J. Garrett Stevens] came up with the brainstorm that ETFs would be a good platform to help them reach their goals."
Clearly there was demand. "People have strong convictions, and if they feel they can get a decent investment, they will take advantage of the opportunity," says Phillips. And so the first Christian-based ETF in the U.S. was born.
More Faith-Based ETFs on the Way
But FaithShares is not the first faith-based ETF. JETS DJ Islamic Market International Index launched in July 2009. This is likely just the beginning. While the universe of socially responsible ETFs is small, with less than 15 such funds, interest is growing.
"There is increasing awareness and sensitivity to socially responsible investing by fund managers, institutions and foundations, as well as the general public," says Tony Keena, a partner and financial advisor with Estate and Business Planning Group.
In addition, using socially responsible investing (SRI) criteria is no longer simply a form of activist investing, but a way to pick companies that have long-term focus and strong risk management, as measured by their environmental, social and governance (ESG) practices, points out Eric Lybarger, principal of Evergreen Global Investment Group. "As global stock exchanges, like NYSE Euronext, make ESG information readily available to investors, ETF companies will likely create more offerings around different ESG criteria," he adds.
People want to speak with their dollars. In this era of accountability, corporations are taken to task on issues like their environmental impacts, how they treat their employees, whether their boards are independent, and more. These factors come into play with FaithShares as well. "After the faith screen, we look at the best of the rest in these areas," says Garrett.
Is This a Sustainable Niche?
It's not surprising then that social responsibility is extending into ETFs, social venture capital and social private equity, says Keena.
The question though, asks John Gabriel, an ETF analyst with Morningstar, is whether such funds will get enough assets to stick. "JVS, which launched in July, has just below $15 million," says Gabriel. "It's a very targeted audience."
However, according to FaithShares Advisors, from 2000 to 2006, assets in other faith-based investments have grown sevenfold, underscoring the public's desire for investment vehicles that operate by the principles of the Good Book.
Socially responsible ETFs, which until now have focused primarily on environmental issues such as renewable energy, typically are a tad more expensive than other ETFs. For example, the iShares KLD Select Social Index has a net expense ratio of .50, compared to 0.07 for the Vanguard Total Stock Market ETF. However, currently investors are getting what they pay for. "SRI ETFs are outperforming other ETFs because they are overweighted in technology, and technology has been the best performing sector year-to-date," says Gabriel.
So why go for a SRI ETF instead of an SRI mutual fund? ETF fans tout their lower expenses compared to mutual funds, intraday liquidity and transparency. Then too, because an ETF usually tracks an index, they're more tax efficient, says Keena. SRI ETFs make more sense for investors looking to make focused plays on an investment theme, like clean technologies or bio fuels. "Again, because these funds are so focused in nature, they do not work well as a core holding in a portfolio," says Lybarger.
Ideally, he adds, investors who want an SRI portfolio would do well to seek a combination of SRI mutual funds for their core holdings and use SRI ETFs in smaller percentages to round out their portfolio. "They can also expect returns that are mostly similar to a conventional fund portfolio," says Lybarger.
The debuts of FaithShares Baptist Values Fund and FaithShares Lutheran Values Fund are planned for Dec. 15. And as proof that FaithShares Advisors practices what it preaches, a tithe of 10% of net income will go to ministries associated with the respective denominations.