4 Funds for ‘Socially Responsible’ Investors

by Will Ashworth | February 13, 2012 12:00 pm

“Socially responsible investing” (SRI) — investing in companies with social, environmental or other good practices — has been around for a long time. But lately, it seems to be gaining a head of steam. According to the 2010 Report on Socially Responsible Investing Trends in the United States, 26 ETFs with assets of approximately $4 billion incorporated environmental, social and governance (ESG) factors in their funds. And Since 2007, ETF’s using ESG have seen a 225% increase in their assets, which is faster than any other investment vehicle.

With this in mind, I’ll take a look at “socially responsible” indices and their ETF offspring. Doing good and making money can and do go hand in hand.

Four ETFs currently are available that play ESG/SRI indices. All four indices are owned by MSCI Inc. (NASDAQ:MSCI[1]) and are relatively competitive with other broad market indexes.

The oldest of the four indices would be the MSCI KLD 400 Social Index, which got its start all the way back in May 1990. The index is based on 400 stocks from the MSCI USA Investable Market Index that demonstrate high ESG ratings. Companies excluded include alcohol producers, cigarette manufacturers, casinos, gun manufacturers, nuclear power and those involved in military weaponry. Its five-year annualized return to the end of 2011 is 0.21%, 14 basis points lower than the MSCI USA Investable Market Index.

The corresponding ETF is the iShares MSCI KLD 400 Social Index Fund (NYSE:DSI[2]), which charges 0.5% annually. In the same five-year period, the ETF’s annual return is 49 basis points lower, for a 0.28% loss. Interestingly, its five-year annual return is identical to the S&P 500.

The three remaining indices are a bit younger. The iShares MSCI USA ESG Select Social Index Fund (NYSE:KLD[3]) has been around since January 2005 and has an annual expense ratio of 0.5%. The KLD tracks the MSCI USA ESG Select Social Index, which includes only American companies.

The final two funds come from ESG Shares in conjunction with investment adviser Pax World Management LLC. The North American option is the Pax MSCI North America ESG Index ETF (NYSE:NASI[4]), which charges an expense ratio of 0.5%. It follows the MSCI North America ESG Index, which includes U.S. and Canadian businesses. The wider option is the Pax MSXI EAFE ESG Index ETF (NYSE:EAPS[5]), which has an 0.55% expense ratio. EAPS follows the MSCI EAFE ESG Index, which incorporates companies from 22 developed countries, including Germany, the United Kingdom, Israel, Australia and Japan.

Because the two Pax funds are only slightly more than a year old, I’m only able to compare one-year returns. The best performance of the three funds is KLD at 5.88%. Next best is NASI at 3.02%, and EAPS trails the field miserably at -7.52%.

Bottom Line

The clear winner of the four ETFs is the USA ESG Select fund, whose five-year annual return is 1.57% — 84 basis points better than both the S&P 500 and the KLD 400 fund. Having just 175 holdings compared to 396 for the KLD 400, USA ESG Select manages to do a good job replicating the entire U.S. stock market despite applying the additional ESG screens. It appears you can do well with socially responsible investing.

As of this writing, Will Ashworth did not own a position in any of the stocks named here.

  1. MSCI: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSCI
  2. DSI: http://studio-5.financialcontent.com/investplace/quote?Symbol=DSI
  3. KLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=KLD
  4. NASI: http://studio-5.financialcontent.com/investplace/quote?Symbol=NASI
  5. EAPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=EAPS

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