The new ETFs would present a more global set of choices for SRI advocates, both in numbers and greater global diversity.
Despite a growing number of mutual funds taking a socially minded theme, few options exist for exchange-traded fund investors in the field.
But that's about to change. Pax World Management Corp., which in 1971 opened the first traditional mutual fund that took a so-called socially responsible investing focus, has filed to enter the ETF market.
In its registration statement to the Securities and Exchange Commission, the Portsmouth, N.H.-based asset manager proposes to launch three ETFs. If given a green-light by regulators, the new trio of SRI-focused ETFs trading on the New York Stock Exchange would be:
- The sShares KLD North America Sustainability Index ETF
- The sShares KLD Europe Asia Pacific Sustainability Index ETF
- The sShares FTSE Environmental Technologies Index ETF
"These are very intriguing. There has been a dearth of tools in the international SRI field for passive investors," said Lorne Abramson of ELM Advisors in Burlingame, Calif.
Portfolios featuring environmentally friendly technologies are popular and plentiful in both traditional funds and ETFs. But that's just one segment of the socially responsible investing movement, which now has 126 broad-based mutual funds picking stocks based on a variety of SRI criteria, notes David Kathman, a Morningstar Inc. analyst.
"There have been a lot of green-focused funds popping up with some sort of environmental mandate. But among ETFs with broader SRI mandates, only a few choices are available right now," he added.
Abramson, who works with high net worth and institutional clients, says that he has been searching for years to find passively managed and index-based SRI funds. The only mutual fund options fitting such criteria he says available now are a pair from Vanguard and TIAA-CREF. Also, Dimensional Fund Advisors has recently moved into the category.
In terms of ETFs, Abramson says just two broadly diversified SRI ETFs are on the market. Both are from Barclays Global Investors and came out more than two years ago. The iShares KLD 400 Social Index (NYSE: DSI) was first, launching in early 2005. The iShares KLD Select Social Index (NYSE: KLD) followed at the end of 2006.
"The Pax World funds will greatly expand the SRI indexing universe in terms of both geography and the number of choices passive investors have to diversify their strategies," said Abramson.
In fact, he has only found one fund to use to gain international stock exposure using SRI screening methods. That's through the new DFA Sustainability Core Fund (DFSPX). "Most SRI funds are actively managed," said Abramson. "It's still difficult to find a passively managed option, whether it's through a traditional mutual fund or ETF."
Pax World, which runs a family of eight SRI mutual funds with $1.9 billion in assets under management, declined to comment on the new filing to enter the ETF marketplace.
But as most mutual fund companies have been bleeding assets lately, suffering heavy redemptions, Pax World has been attracting net inflows this year. So far this year through Thursday, it has reported net inflow of $58 million.
Contrast that with estimates by various analysts that since mid-September alone, some $300 billion has been pulled from stock and bond mutual funds in the U.S. When redemptions from hedge funds as well as stocks and bonds are added to the mix, those totals jump to around $450 billion, according to data compiled by Forbes.com.
At the same time, investors have been putting more of their money into ETFs. In the past three months through November, net inflows into ETFs reached $90.4 billion, says the National Stock Exchange. In 2008, net inflows for ETFs heading into December had surpassed $137 billion.
"The range of uses ETFs offer is clearly attracting a growing number of investors," said Michael Traynor, head of strategy at NSX.
Besides offering index-based international exposure for investors, the trio of new SRI funds will expand the reach of established benchmark provider KLD Research & Analytics. It created the indexes for both DSI and KLD.
Just like other SRI funds, the KLD Europe Asia Pacific Index and the KLD North American Sustainability Index will include companies screened by environmental, social and governance factors. But each will remain sector neutral to the S&P/Citigroup BMI Europe Asia Pacific composite index and the S&P/Citigroup BMI North America composite index, respectively.
That will translate into the new ETFs remaining in sectors such as defense and oil and gas that many SRI funds avoid—including DSI. But the Pax World offerings will share such full-market coverage with the other current SRI ETF on the market, KDL.
The two foreign Pax World portfolios will rely on KLD's ranking process of top SRI names in each sector. The ETFs' portfolios will be weighted according to how each company scores on a number of criteria. Besides environmental practices and corporate governance, the indexing process includes data related to product integrity and community activism.
The FTSE ET50 Index consists of the 50 largest pure-play environmental technology companies globally, including alternative energy, water treatment, pollution control and waste management companies.
The initial filing lists a management fee of 0.60% for the new ETFs. The registration document can be found here.