Dimensional Fund Advisors has filed to create two sustainability funds—one covering the U.S. market and one covering the international market—as well as a selectively hedged global fixed-income fund. (You can read the prospectus here.) Like all DFA funds, the three funds are designed for long-term investors and are offered only to institutional investors or through registered investment advisors.
The sustainability funds are not DFA's first foray into socially responsible investing. The firm already has the U.S. Core Social Equity 2 Portfolio, which has several social screens; however, the focus of the two new SRI funds is mainly environmental.
Negative factors that could lead to a stock being excluded or underweighted include production of agricultural chemicals such as pesticides, contributing to climate change through involvement in the coal or oil industries, a record of hazardous waste or waste management violations, manufacture of ozone-depleting chemicals, a record of environmental regulatory violations, excessive toxic chemical emissions, or having a negative economic impact on the communities. A company's involvement in any other type of environmental controversy could also be grounds for exclusion.
Positive factors that can make a company more attractive to the fund include the provision of environmentally beneficial products or services, efforts by the company to use cleaner energy and reduce the amount of pollution it produces, a strong exhibited commitment to environmental management systems, recycling or the use of recycled materials in its operations, and any other environmental initiatives it may take.
As with many DFA funds, the proposed sustainability funds will have an increased exposure to small-cap value stocks. The U.S. Sustainability 1 Portfolio will have a net expense ratio of 0.35%, while the International Sustainability 1 Portfolio's expense ratio will be 0.55%.
The fee for the U.S. fund is lower than the expense ratios for the iShares KLD Select Social Index Fund (AMEX: KLD) and the iShares KLD 400 Social Index Fund (AMEX: DSI), which are 0.50% for both. However, it is higher than the fees for the Vanguard FTSE Social Index Fund, which are 0.11% for the institutional shares and 0.25% for the investor shares. But none of these funds are strictly focused on environmental issues in the way that the DFA funds are.
The Selectively Hedged Global Fixed Income Portfolio is a unique investment. It will invest in a wide range of foreign and domestic debt and will be managed with the goal of capturing credit and maturity risk premiums. Unlike most DFA funds, which tend to use a buy-and-hold strategy, the prospectus says this portfolio is expected to have a high turnover. As implied by the portfolio's name, it will have the ability to strategically hedge the currency exposure of its foreign securities through foreign forward currency contracts as needed. The fund may also hold significant concentrations in foreign and U.S. banks and bank holding companies should the yield to maturity on eligible banking securities exceed that of the eligible universe of securities for a period of five trading days.
The net expense ratio for the fund will be 0.25%.