The most popular include some of the better-known fund families in this area: Parnassus, Ariel, Pax World, Amana, Calvert, Domini and Sentinel. Similar to ETFs, SRI mutual funds have grown at a rapid clip. As of 2007, there were 260 socially screened mutual fund products in the US, with assets of $201.8 billion. By contrast, there were just 55 SRI funds in 1995 with $12 billion in assets (Socialinvest.org).
The below article is the last in our 5 part series on SRI Trends:
4. Growth of Exchange Traded Funds (ETFs). This is an area that may well need little, if any introduction. Though a recent addition to investment portfolios during the last decade, ETFs have become an overnight sensation.
Definition: ETFs offer public investors an undivided interest in a pool of securities and other assets and thus are similar in many ways to traditional mutual funds, except that shares in an ETF can be bought and sold throughout the day like stocks on an exchange through a broker- dealer. ETFs therefore possess characteristics of traditional mutual funds, which issue redeemable shares, and of closed-end investment companies, which generally issue shares that trade at negotiated market prices on a national securities exchange and are not redeemable (Source: Securities and Exchange Commission).
History: In the beginning, ETFs were more simplified investment vehicles utilized to mimic the S&P 500 index. The first major product, SPDRs (introduced in 1993) was nicknamed “Spiders.” As you can see, the ETF industry had creative marketing popularizing them since Day 1. However, ETFs took off in the early 2000s, when Barclays Global Investors launched the ishares line. Within 5 years, iShares surpassed all of its competitors. Since then, new competitors have entered the market slicing and dicing industries and sectors into a thousand pieces. According to the Investment Company Institute (ICI) the number of ETFs grew from just 29 in 1998 to 797 by 2009, representing $777Bn in assets.
It was only a matter of time that ETFs would move out of its humble beginnings as a broadly based index fund, to a mimicker of certain Socially Responsible Indices, such as those following the popular, and longest-running Domini Social Index (now called FTSE KLD 400). According to Morningstar, there were over $3.2Bn in about two dozen SRI related ETFs as of mid-2010.
This website will not advocate investing in ETFs for a variety of reasons. For starters, they attract a speculative nature (e.g., animal spirits) in people. I just can’t reconcile the “making of a quick buck” with ethically-based SRI. Other negatives include: Tracking error, Index Composition, sometimes-high management expenses, opaque operating structure, and hidden fees. Hmm, maybe the ETF holding company itself should be analyzed for ESG criteria!
SRI ETFs, given their niche nature only exacerbate these potential disadvantages. For example, by default, an ETF tracking the S&P500 will likely have much lower fees and little tracking error, compared to a small, new, exotic ETF tracking solar energy. Besides, nearly all of the SRI ETFs are invested in “Green-Energy” indices, rather than indices of socially responsible corporations (regardless of whether they’re in green industries or not). Also, much has been written about surprise investments within ETFs including shares of Halliburton, and BP/Transocean. As I’ve stated previously, but bears repeating, the individual investor’s desires and moral suasions become disconnected from the ETF’s investment process, and hence, positions.
If you must invest in pooled assets, I recommend screening MorningStar for SRI-based mutual funds. Morningstar actually uses another name for SRI, calling it Socially Conscious funds. It defines them as,
“Any fund that invests according to non-economic guidelines. Such funds may make investments based on such issues as environmental responsibility, human rights, or religious views. A socially conscious fund may take a pro-active stance by selectively investing in, for example, environmentally friendly companies, or firms with good employee relations. This group also includes funds that avoid investing in companies involved in promoting alcohol, tobacco, or gambling, or in the defense industry.”
5. Community investing is directing capital from investors and lenders to communities that are underserved by traditional lenders. According to the Social Investment Forum “Community investing provides access to credit, equity, and basic banking products that these communities would otherwise lack.” Assets in community investing institutions rose about 32% from $19.6Bn in 2005 to $25.8Bn in 2007. I am a great believer of this type of investing; however, it is out of the scope of this website, hence the quick description. Interested readers are urged to link to Communityinvest.org.