Mutual Fund Commentary
SOCIALLY RESPONSIBLE INVESTMENT IDEAS
An increasing number of exchange-traded funds (ETFs) focus on fundamental factors, such as dividends and volatility, offering a twist on the traditional market-cap weighted offerings that track the S&P 500 Index and others. But, there are also ETFs for investors that seek a more socially responsible portfolio.
Last month when Arizona passed a law, ultimately vetoed, that would have allowed businesses to refuse service to gay men and lesbians on religious grounds, a number of large-cap companies such as Apple (AAPL 548 ****) and Verizon Communications (VZ 47 ***) threated to withdraw business from the state. Coincidentally, we think, at the same time a new ETF that focused on corporations with progressive workplace policies launched. ALPS Workplace Equity Portfolio (EQLT 25 NR) still remains quite small, with just $5 million in assets, but it joins a handful of other socially responsible ETFs.
EQLT consists of approximately 160 publicly-traded stocks of U.S. and foreign companies identified by Denver Investments for supporting equality for lesbian, gay, bisexual and transgender (LGBT) employees through their workplace practices. These include non-discrimination policies, regarding sexual orientation and gender identity, and providing full benefits for same-sex spouses, domestic partners and transgender individuals. EQLT's holdings include AAPL, VZ, Exelon (EXC 33 ***) and Johnson & Johnson (JNJ 98 ****) and the ETF has an expense ratio of 0.75%. S&P Capital IQ does not currently rank EQLT.
However, the largest of the broadly diversified socially responsible ETFs, with $340 million in assets, is iShares MSCI KLD 400 Social (DSI 70 Overweight). The 400 stocks inside this ETF meet MSCI's criteria for a range of environmental, social and governance issues (ESG). Companies engaged in the sale of alcohol, tobacco, nuclear power and military weapons are excluded. Relative to the S&P 500 Index, DSI has less exposure to Industrials and Utilities and more exposure to Information Technology. Google (GOOG 1,164 ***) and IBM (IBM 194 ****) are among the ETF's largest positions. In 2013, DSI's 35.4% total return was stronger than 32.3% achieved by iShares Core S&P 500 Index (IVV 187 Overweight). Over the three-year period ended March 25, DSI's 15.0% gain was narrowly ahead of IVV's 14.8% though DSI is more expensive with a 0.50% expense ratio (IVV has a 0.07% expense ratio).
iShares also offers a second ESG focused ETF, iShares MSCI USA ESG Select (KLD 78 Overweight). This ETF holds approximately 100 securities that are selected based on positive ESG factors relative to their industry and sector. However, the ETF more closely mirrors the sector representation in the broader MSCI USA Index and only excludes tobacco companies from the list of constituent candidates. Relative to DSI, KLD has more exposure to Financials, including American Express (AXP 91 ****), and Utilities, including NextEra Energy (NEE 94 ***). In 2013, KLD rose 31.2%, and over the three-year period ended March 25 it climbed 12.6%.
Both DSI and KLD receive neutral ranking inputs for S&P Capital IQ STARS and S&P Capital IQ Fair Value, but positive inputs for S&P Capital IQ Quality Rankings and for modest standard deviations. S&P Capital IQ does not meaningfully take into account the ESG attributes of a company in our valuation and risk research, which plays a large part in our ETF rankings relative to all equity ETFs. As such, some companies receive high ESG scores from MSCI or Denver Investments are viewed as undervalued and others fairly or overvalued.
Investors seeking individual stock ideas that are viewed favorably for ESG attributes by a third-party group should look at what's inside these ETFs. To learn more about the ETFs, please see the related S&P Capital IQ reports on this platform.