Socially Responsible ETFs

In recent years, investors have become increasingly interested in socially responsible investing (SRI), an investment approach that considers social and environmental factors in addition to financial returns. One way to invest in SRI is through socially responsible exchange-traded funds (ETFs).

In this article, Benzinga explores socially responsible ETFs, including what they are, how they work, and their potential benefits and drawbacks. We will also provide examples of socially responsible ETFs and answer some frequently asked questions about this investment approach.

What are Socially Responsible ETFs?

Socially responsible ETFs are investment funds that use a screening process to include only companies that meet certain social and environmental criteria. The screening process can vary depending on the specific fund, but it typically includes factors such as environmental impact, labor practices and corporate governance.

The goal of socially responsible ETFs is to provide investors with exposure to companies that align with their values and beliefs while still offering the potential for financial returns. Socially responsible ETFs can invest in a variety of sectors, including technology, healthcare and energy.

How do Socially Responsible ETFs Work?

Socially responsible ETFs use a screening process to include only companies that meet certain social and environmental criteria. This process can include negative screening, which excludes companies that engage in certain activities, or positive screening, which seeks out companies that have a positive impact in certain areas.

Negative screening can include excluding companies that engage in activities such as tobacco, firearms or fossil fuels. Positive screening can include seeking out companies that have strong environmental or social practices or that are leaders in their industry.

Once the screening process is complete, the socially responsible ETF will invest in a portfolio of companies that meet its criteria. The portfolio is typically designed to track a specific index, such as the S&P 500, and the ETF's performance will be linked to the performance of that index.

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Benefits of Socially Responsible ETFs

1. Aligns with values: Socially responsible ETFs allow investors to invest in companies that align with their values and beliefs. This feature can provide a sense of satisfaction and purpose in their investments.
2. Potential for financial returns: Socially responsible ETFs have the potential to provide financial returns that are competitive with traditional ETFs. Studies have shown that companies with strong social and environmental practices can outperform their peers over the long term.
3. Diversification: Socially responsible ETFs provide investors with exposure to a diversified portfolio of companies across various sectors and industries.
4. Active engagement: Some socially responsible ETFs engage with the companies in their portfolio to encourage them to improve their social and environmental practices. This practice can help to promote positive change in the companies and industries in which they operate.

Drawbacks of Socially Responsible ETFs

1. Limited exposure: Socially responsible ETFs may exclude certain sectors or companies that do not meet their social and environmental criteria. This can limit the exposure of the ETF to certain sectors, potentially reducing its diversification and performance.
2. Higher fees: Socially responsible ETFs can have higher fees than traditional ETFs because of the active management required for the screening process and engagement with companies in the portfolio.
3. Subjectivity: The screening process used by socially responsible ETFs is subjective and can vary between funds. This factor can make it difficult for investors to compare and choose between different socially responsible ETFs.
4. Lower liquidity: Socially responsible ETFs may have lower liquidity than traditional ETFs because of the smaller pool of companies that meet their criteria.

Examples of Socially Responsible ETFs

1. iShares MSCI KLD 400 Social ETF (NYSEARCA: DSI): This ETF tracks the MSCI KLD 400 Social Index, which includes companies that meet certain social and environmental criteria. It has an expense ratio of 0.25% and invests in a diverse portfolio of companies across various sectors, including technology, healthcare and consumer goods.
2. Vanguard ESG U.S. Stock ETF (BATS: ESGV): This ETF tracks the FTSE US All Cap Choice Index, which includes companies that meet certain environmental, social and governance (ESG) criteria. It has an expense ratio of 0.12% and invests in a diverse portfolio of large-, mid- and small-cap companies across various sectors.
3. SPDR S&P 500 ESG ETF (NYSEARCA: EFIV): This ETF tracks the S&P 500 ESG Index, which includes companies that meet certain ESG criteria. It has an expense ratio of 0.10% and invests in a portfolio of large-cap companies across various sectors.
4. Global X Conscious Companies ETF (NASDAQ: KRMA): This ETF tracks the Concinnity Conscious Companies Index, which includes companies that have a positive social and environmental impact. It has an expense ratio of 0.43% and invests in a diverse portfolio of companies across various sectors.

Are Socially Responsible ETFs Right for You?

Socially responsible ETFs are a type of investment fund that uses a screening process to include only companies that meet certain social and environmental criteria. While socially responsible ETFs may provide financial returns that are competitive with traditional ETFs, they may also have higher fees and limited exposure to certain sectors. However, socially responsible ETFs allow investors to align their investments with their values and beliefs while still providing exposure to a diversified portfolio of companies across various sectors and industries. Research the specific screening process used by each fund and determine which criteria align with your values and beliefs before investing in a socially responsible ETF.

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