Over the past year, there has been a lot of talk about socially responsible investing, and we have seen a wave of products in the ETF space.
In fact, the big winner at last night’s ETF.com Awards was the SPDR SSGA Gender Diversity Index ETF (SHE), a one-year-old fund with $290 million in assets, which won an unprecedented five awards. SHE tracks a market-cap-weighted index of U.S. large-cap companies with a relatively high proportion of women in executive and director positions.
The fund has performed well, with a 13.5% return over the last month, despite trailing the SPDR S&P 500 ETF Trust (SPY), which has seen a 17.3% gain during the same time.
Chart courtesy of StockCharts.com
But the point of these socially focused funds is not to outperform, but to be in line with the market while offering an added return of social peace of mind. Investors in these kinds of funds certainly don’t want to lose money, but if they’re giving up some performance while contributing to a greater social good, that’s a trade-off most will embrace.
Same goes with investors in the biggest batch of these principles-based funds that include screening out big carbon-producing companies, or those public companies that own fossil fuel reserves or make guns or tobacco. These funds are constructed to keep up with the market using sector caps and other structural designs to prevent high concentration into one pocket of the market.
However, the one issue that may be working against this idea of investing is something as simple as this: Many people don’t really know what their true principles are, much less understand how to align them with investing.
Maybe that’s a cynical statement, but I think it rings true when you look at the antipathy when it comes to voting. Out of the 230 million voter-eligible population, 40%—or more than 90 million American citizens—didn’t vote in the last presidential election. The disparity between presidential candidates couldn’t have been more stark, but nearly 100 million citizens didn’t care.
You have to be fervent in your beliefs to trade possible underperformance in your investments for what you see as a greater good.
Pennies From Heaven
There is an area, though, that fosters maybe the most fervent supporters when it comes to principles: religion.
Also over the last year, there has been another green shoot sprouting in this area of socially responsible investing: religious-valued ETFs. While not as much a headline grabber as SHE and climate-friendly funds, there have been two religious-based ETFs launched this year: the Inspire Global Hope ETF (BLES) and the Inspire Small/Mid Cap Impact ETF (ISMD).
Both are equity funds that track equal-weighted indexes that screen stocks that are in alignment with biblical values and positive impact on the world according to various socially responsible criteria. Since their launches on Feb. 28, BLES has attracted $28 million in assets and ISMD has $18 million in AUM. That’s pretty darn good for a new issuer with a niche focus, in a little over a month.
There have been other funds that intimate a religious bent, but these two funds spell out clearly that the Bible is a guiding hand in stock selection.
Catholic Values ETF
Last year around this time, the reiteration of overtly religion-focused ETFs came on the scene with the Global X S&P 500 Catholic Values (CATH), which has attracted $89 million in assets since it launched last April 18. Again, that AUM is nothing to sneeze at. CATH, like SHE, has performed well, with a return of 14.26% since launch versus SPY’s 15.72% during that time.
CATH tracks an index of U.S. large-cap stocks selected from the S&P 500. The cap-weighted index omits companies from certain industries at odds with Catholic values. The fund tracks the S&P 500 Catholic Values Index.
The relative success of CATH and the auspicious start for BLES and ISMD should be closely watched by ETF issuers, because this space could potentially be the next big thing in the socially responsible ETF world.
Remember Faith Shares?
I say “reiteration” above because the ETF industry has seen this movie before, with Faith Shares, which launched a suite of religion-based ETFs in 2009, only to shutter the suite of five funds in 2011 after attracting $10 million in assets.
The funds were: the FaithShares Baptist Values Fund (FZB), FaithShares Catholic Values Fund (FCV), FaithShares Lutheran Values Fund (FKL), FaithShares Methodist Values Fund (FMV) and FaithShares Christian Values Fund (FOC).
Also, in October 2010, Javelin Investment Management shut its Shariah-focused ETF, the JETS Dow Jones Islamic Market International Index Fund (JVS), after it too had failed to attract significant assets.
So what’s different this time? A lot. Primarily that, in the last six years, the ETF industry has grown tremendously in size, while investor awareness from millennials to senior citizens has grown just as big when it comes to ETFs.
More people identify themselves with a religion than a social cause, and the idea of investing in the broad market in different slices—whether that employs smart beta or fossil free or Catholic value screens—is not so odd anymore.
Good ideas commonly arrive before their time, for various reasons. With the right distribution, and launching a product with investors committed before it hits the market, religious-valued ETFs like the three on the market show they can be viable products. The $134 million in asset collected by CATH, BLES and ISMD in less than a year lend credence to potential success this time around.
At the time of writing, the author own none of the ETFs mentioned. Drew Voros can be reached at [email protected].