From the April 2009 issue of Investment Advisor • Subscribe!

April 1, 2009

The ETF Advisor: Socially Responsible Investing

Comparing the ETF and mutual funds options

[This is the first installment of a new monthly feature in Investment Advisor. The ETF Advisor will use the institutional-strength research and analysis resources of Standard & Poor's to explore exchange traded funds and how they can be used in building client portfolios. This month, S&P senior writer Vaughan Scully explores SRI ETFs.]

Exchange traded funds had a tough year in 2008: roughly 50 of the more than 700 ETFs listed in the United States were liquidated last year. But not to worry, ETF sponsors are still hard at work creating new portfolios that scratch every investment itch known to mankind.

This will be good news for those interested in socially responsible investing (SRI), as there will be several additions to the relatively thin list of exchange traded funds focused on companies with sustainable environmental practices, good corporate governance, respectful

policies for workers, and other attributes aimed at making the world a "kinder, gentler" place.

At the end of 2007, there were 173 different mutual funds but just eight ETFs screening for positive social and environmental practices, according to a report by the Washington, D.C.-based Social Investment Forum.

Of these, the PowerShares Wilder Clean Energy Portfolio is the largest, with about $600 million in assets under management. (By contrast, Ariel Fund, a broad-based socially responsible mutual fund launched in 1986, has close to $1.3 billion in AUM.) Other SRI ETFs include the iShares KLD Select Social Index Fund and the iShares KLD 400 Social Index Fund.

Generally, mutual funds specializing in socially responsible investing have broad definitions of what SRI means. So far, most of the socially responsible ETFs have narrower definitions, focusing mostly on the development of alternative energy and "green" or eco-friendly business policies and practices.

(To view how select SRI mutual funds have performed versus their ETF counterparts, see table below.)

New This Year

While advocates of socially responsible investing like to champion the idea that one can "do well by doing good," socially responsible funds and ETFs have not been immune to the market downturn.

Nevertheless, advisors with clients interested in the SRI space may also want to keep their eyes open for several ETF launches planned for 2009.

New Hampshire-based mutual fund manager Pax World--which considers environmental, social, and governance (ESG) issues when picking stocks for all its funds--plans to launch three new SRI-screened ETFs in 2009: the sShares FTSE Environmental Technologies Index ETF, and two regionally oriented funds; the sShares KLD Europe Asia Pacific Sustainability Index ETF and the sShares KLD North America Sustainability Index ETF.

Oklahoma City-based Veritas Funds plans to launch four funds designed to appeal to the Baptist, Roman Catholic, Lutheran, and Methodist denominations of Christianity as well as a general, nondenominational Christian fund. The Catholic fund, for instance, will exclude companies that make contraceptives or engage in stem cell research.

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