ETF Watch: ‘Biblically Responsible’ ETFs Debut

Today a new firm has launched a pair of ETFs that are designed to appeal to conservative Christian investors. The Inspire Small/Mid Cap Impact ETF (ISMD) and the Inspire Global Hope Large Cap ETF (BLES) offer a twist on the usual environmental, social and governance (ESG) framework, with a “biblically responsible” version designed to match conservative evangelical Christian values.

The funds each come with an expense ratio of 0.61% and are listed on the NYSE Arca exchange. The investment advisor is listed as CWM Advisors “doing business as” Inspire.

Inspire has been involved in the biblically responsible investing space for the past several years, with the goal of making “an impact with our investments in light with biblical values,” said Inspire CEO Robert Netzly.

“Consistently, there are always people asking for a low-cost index-based solution that delivers a lot of impact but also meets biblically responsible investing [BRI] guidelines. There just was nothing available. A couple of years ago, we decided to meet that need after years of hearing about it,” Netzly said of the origins of the ETFs.

The Screening Process
Both funds track indexes offered by Inspire that target some typical ESG issues but also some that are not so typical. Companies with “any degree of participation in activities that do not align with biblical values” are removed from the investment universe, according to the prospectus. That includes generally accepted ESG no-go zones such as alcohol, gambling and human rights violations, but also abortion, pornography and LGBT lifestyle. They appear to be the first ETFs to target support for the LGBT community as a reason for exclusion.   

“What we’ve found is that there’s a lot of investors—not just Christians, but investors with conservative values—that want to support traditional marriage. Part of our exclusionary screening, that biblically responsible screening, that’s one of the components that we look at. Certain companies choose to take a hardline stance on the issue of gay marriage, for instance, and our investors don’t want to support that issue. So that’s something we include in the biblically responsible investing criterion to really give those conservative values investors a product that fits their beliefs and their values,” Netzly said.

Interestingly, the prospectus makes no specific mention of other typically taboo industries in the ESG universe such as weapons, defense, fossil fuels or tobacco.  

Impact Scores
Once the screens have been applied, the methodology uses a positive scoring approach to evaluate companies’ publicly available policies and procedures for how well they align with biblical guidelines, the prospectus says.

Companies’ Inspire Impact scores are based on the benefits of the products and services they provide; the workplace environment they provide and employment practices they engage in; their benefit to the community in terms of volunteerism and philanthropy; and efforts to protect and preserve the environment.

Netzly says his firm is more focused on the positive screens.

“The companies that have issues, they’re just not inspiring enough to make the cut. We really are looking for inspiring companies. We feel that SRI [socially responsible investing] and BRI, in general are really focused too much on just the negative, and the conversation has all been about kicking out the bad guys. We really feel that the conversation should be much more about ‘Let’s find a company that’s doing really amazing things, really inspiring, really adding value to the world, being a blessing to the world. Let’s just invest in those companies.’ And by default, you’re going to [eliminate] bad actors,” he said.

Methodology
BLES’s original investment universe combines the large-cap companies included in the Russell 1000, the MSCI EAFE Index and the MSCI Emerging Markets Index. Ultimately, after the screens and scoring have been applied, the methodology selects the top-scoring 400 companies with at least $10 billion in market capitalization for inclusion in the index.

Netzly describes the portfolio as 50% domestic, 40% developed markets and 10% emerging markets. The index is equally weighted and rebalanced quarterly.

Domestically focused ISMD’s index uses the Russell 2000 and S&P 400 Indexes as its starting universe. At the end of the selection process, it has a portfolio of the 500 top-scoring companies with less than $10 billion in market capitalization. According to Netzly, the index is 50% midcap and 50% small-cap in terms of allocation.

“We feel it really gives you a sweet spot where you can capture companies that are going from small-cap on their way to large-cap very quickly—that sweet spot between $1 billion and $3.5 billion is where you can capture this very steep part of their growth trajectory. You can take part in what we feel is the above-average return potential of those companies,” Netzly added.

He noted that ISMD’s index has an annualized five-year-return of 19%, while BLES’s index returned 11.7% during the same period.

Other Religion-Focused ETFs
The field of ETFs using religiously inspired selection processes is quite small. With the closure of the Falah Russell-IdealRatings US Large Cap ETF (FIA) last year, the only such fund is the $87 million Global X S&P 500 Catholic Values ETF (CATH), which rolled out in April 2016.

CATH screens out companies with any revenues generated from unconventional weapons, contraception, abortion, stem-cell research and pornography production, as well as firms that have been proven to use child labor.

The FaithShares family of ETFs, which sought to offer customized values-based ETFs for people of the Baptist, Catholic, Lutheran and Methodist religions, launched in 2009, but shut down in 2011. However, the firm later morphed into Exchange Traded Concepts, a provider of turnkey ETF solutions.

Netzly estimates that evangelical Christians in the U.S. control some $13.7 trillion in assets. “Almost none of it is currently involved in biblically responsible investing,” he noted, describing the market as “radically underserved” and devoid of low-cost options.

Netzly says the market is ripe for growth, and predicted that biblically responsible investing would be the fastest-growing category in the socially responsible investment space over the next five years. He added that his firm has seen significant interest from institutions looking for low-cost impact investments that align with biblical values.

Contact Heather Bell at [email protected].