Religious ETFs Still Struggling To Gather Assets

While ESG funds are booming, Kirstie Brewer questions whether faith-based funds are having the same success

etf
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Reviewed by: Kirstie Brewer
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Edited by: Kirstie Brewer

Religious-oriented exchange traded products (ETPs) can generate promising returns and being an ethical, conscious investor is bang on trend, yet faith-based funds are struggling to gather assets overall or enter the mainstream market.

Investors are increasingly looking at ‘socially responsible investing’ – funds which consider ESG (Environmental Social and Corporate Governance) factors. Many of these ESG considerations – and the companies which are screened out of investment as a result – overlap with the values of Christian and Shariah-compliant funds; excluding companies from the index which generate any revenue from child labour or nuclear weapons, for example.

The next leap of faith in this sector will be the S&P 500 Catholic Values ETF, by New York-based firm Global X.

Global X declined to be interviewed at this time, but stated in a press release earlier this year that the offering has been designed to adhere to the socially responsible investment guidelines of the United States Conference of Catholic Bishops. It is reportedly due to launch by the end of the year.

Sustainable Investing – A Compelling Case?

There is a compelling case for launching sustainable investment strategies – and now is a good time to do it, believes Jon Hale,  director of manager research in North America for Morningstar.

“So much wealth is being transferred from baby boomers to younger generations, which appear to be far more interested in combining their views on a sustainable global economy with their investments,” he said. “Similarly, there are more women who are investment decision-makers, within families, individually, and as employees of institutions, and they indicate more interest in sustainability, on average, than men.”

Being Green Is Bang On Trend

Various forms of ESG, ethical or green investments have been growing recently as a result of increased pressure from institutional investors and investment managers, on the one hand, and the NGOs, inter-governmental organisations, think-tanks and other public campaigners on the other, added Julia Kochetygova, head of sustainability indices at S&P Dow Jones.

“The UN PRI’s [United Nations Principles for Responsible Investment] and UNEP’s [United Nations Environment Programme] role is particularly important here, but also other players such as Sustainable Investment Forums, Climate Tracker and Climate Bond Initiative, are also important,” said Kochetygova.

Since launching in 2006, the UN’s Principles of Responsible Investing has attracted 1378 signatories, with combined assets under management of more than $59 trillion. Indeed, some of Europe’s leading ETF issuers have signed up to its principles – The Vanguard Group, Lyxor Asset Management and BlackRock are some examples.

 

Generating Returns

But do sustainable investment portfolios take a hit performance-wise? Broadly speaking, Hale does not believe so. He said:

“Over the years [sustainable investment portfolios] have evolved from simple exclusionary screening based on certain products – like tobacco – or activities to today’s more integrated approach to evaluating companies, have demonstrated that they perform on par with other investments,” he said.

He concedes that there can be shorter-term periods when excluding certain companies or underweighting sectors can hurt performance but sustainable investing is a long-term concept, he argued, and increasingly, research is showing that certain ESG factors are material to long-term financial performance.

Many of the ESG factors tend to be financially material risk-reducing factors, agreed Kochetygova, who cited carbon-related and labour safety-related aspects as such examples.

“There is sometimes a trade-off between principles and profitability,” she said. “Some religious organisations are prepared to give up part of the returns for the sake of compliance with ethical norms.”

Building A Presence

And despite the appetite in the market and the potential returns for investors, the current numbers of religious-oriented ETFs show that this industry has a lot of work to do before it enters the mainstream. As of June 2015, there were 76 ETFs/ETPs which fall under the bracket of socially responsible investing / ESG / Shariah. These account for $14.1 billion in assets, with the bulk being from Europe ($10.5 billion), according to data from ETFGI.

However, as Deborah Fuhr, founder of the research and consultancy house notes, the large size of European ETF/ETP assets is mainly from three large commodity products. Their tickers are PHAG, PHAU, GBS, and they account for three-quarters of those assets ($7.97 billion).

Beyond the commodities space and these three offerings in particular, Shariah-compliant funds have only galvanised relatively modest levels of assets. A trio of equity-based Shariah-compliant funds from iShares are an example. Their combined assets only just top $142 million, though they have survived since 2007 (see chart).

If the ESG space is booming, why have religion-based ETFs only taken a small slice of its success so far? Hale’s take is that religious-oriented funds, be they open-ended mutual funds or ETFs, have a much more limited potential market than secular sustainability strategies, which have much wider appeal, yet encompass many of the same issues that the religious funds are concerned about.

“So unless a religious fund has a particular sales distribution path with a religion or denomination it is likely to have modest success attracting assets, and because ETFs aren’t sold the way funds are sold, ETFs may have a particularly difficult time of it,” he said.

These ETFs Need Solid Distribution Channels

Companies like Thrivent Financial and Everence have historical connections to a particular Christian denomination and have therefore ready-made access to their target audience. Some of these types of firms, which largely exist in the U.S., will also have managed the denomination’s endowment. They can leverage fund wholesalers who can target an adviser who caters to that denomination, or who may live in a heavily Catholic area, for example.

“For ETFs in general, wholesaling doesn’t really work because there is no way to track who decides to invest in an ETF,” said Hale. “Without wholesalers out trying to encourage sales, an ETF is left to being on brokerage platforms alongside thousands of other investments.”

The faith-based ETFs arena is still arguably in its infancy. In 2009, Oklahoma-based FaithShares, was the only issuer to offer faith-based ETFs. By the end of summer 2011 its suite of six ETFs – which followed the principles of different Christian denominations – had closed amid a tough capital raising environment. Garrett Stevens, FaithShares co-founder, has since launched an altogether more secular firm, ETFs Exchange Traded Concepts.

“It’s just hard to build assets for niche products,” said Hale. “I think that’s one reason why so many ETFs have a tough time building up assets.”

Name

LSE Ticker

Inception Date

AUM (Year to 1/09/15)

Performance (Year to 9/9/15)

iShares MSCI Emerging Markets Islamic UCITS ETF

ISEM

7/7/2007

$18,437,210

-14.29%

iShares MSCI World Islamic UCITS ETF USD

ISWD

7/12/2007

$89,566,332

-6.74%

iShares MSCI USA Islamic UCITS ETF USD

ISUS

7/12/2007

$33,883,516

-8.78%