Socially responsible investing―which goes by many names including ethical investing, impact investing, sustainable investing and others―is "an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact," according to Forum for Sustainable and Responsible Investment (US SIF).
Socially responsible investing is a big deal. Some estimates peg the amount of assets tied to such strategies at as much as $7 trillion in the U.S. and $21 trillion globally.
In the U.S., that's equal to 18% of total assets under management, according to a study by the US SIF. In the mutual fund world, $2 trillion is invested in socially responsible funds, with hundreds to choose from.
Now these strategies are making their way into exchange-traded funds, which may be the next growth area for socially responsible investing.
Nine Launches Just This Year
There are now 22 ETFs that could be considered socially responsible with a total of $1.6 billion in assets (they can be found on the ETF.com screener and database by choosing "Principles-based" under the "Selection" tab after clicking "More Filters"). Of those 22, nine launched just this year.
Each of these ETFs aims to invest in companies that do social good, but each does it in its own way. From focusing on environmental concerns to diversity to religious considerations, there's no one set of rules that governs these funds.
At the same time, in terms of performance, there's no clear-cut answer to whether socially responsible investing helps or hurts returns. Given the wide range of strategies employed, making comparisons is difficult.
David Kathman, analyst with Morningstar, summed it up by saying, "There will be times when a social screening will hurt you and times when it will help you, but over time it doesn't make a difference."
Keeping Up With The Market
That said, at least this year, socially responsible ETFs seem to be paying off―or at least keeping up with the broader market. Of the 13 such ETFs that were trading at the start of the year, 10 were in the green on a year-to-date basis as of July 12.
Of those 10, three had returns better than the broad U.S. stock market, as measured by the SPDR S&P 500 ETF (SPY | A-97), which is up 6.3% on the year.
Here are the five top-performing socially responsible ETFs of 2016 so far:
At the top of the heap is WIL, with $30 million in assets. WIL is up 9.3% on the year by focusing on stocks of U.S. firms with women as CEOs or board members. Having more diverse leadership at the top of a firm may make a company more successful, according to proponents of this strategy.
Etho Climate Leadership U.S. ETF (ETHO | F-76)
Following closely behind is ETHO, a fund with just $4 million in assets, but it's gained a handsome 9.1% this year. The fund focuses on stocks of companies with the least carbon impact within their industries.
In third place this year is KLD, which is up 7.5% this year. The fund tracks an MSCI index that selects 250 companies with high ESG scores. The fund caps the weighting of individual stocks and sectors so the portfolio doesn't deviate too significantly from the broader market. With $391 million in assets, KLD is the second-most-popular fund in the segment.
At No. 4 on the year-to-date performance list is up DSI, up 5.9%. DSI has a similar mandate to its aforementioned sister fund, KLD, but it deviates even less from the broad market. According to its ETF.com fund report page, DSI has a larger but more restrictive basket of stocks than KLD. DSI is also the largest ETF in the socially responsible segment, with $546 million in assets.
Rounding out the top five performers is LOWC, with a gain of 3.5% so far this year. Like ETHO, mentioned earlier, LOWC aims to overweight stocks of environmentally friendly firms. However, LOWC focuses on overseas firms as well, and clings more tightly to broad, marketlike exposure. The ETF currently has $92 million in assets under management.
YTD Returns For WIL, ETHO, KLD, DSI, LOWC
Contact Sumit Roy at [email protected].