The Ultimate Guide To Socially Responsible ETF Investing (EAPS, NASI, DSI, KLD, GIVE)

Eric Dutram: Socially responsible investment is an emerging trend in financial markets.  The concept has rapidly gained acceptance with mutual funds and ETFs specifically designed to meet such an investment need (ETFs vs. Mutual Funds).

This has largely happened because people are not only concerned about their future in a portfolio sense, but are also worried about the future of the environment and corporate practices as well. Apprehension about misuse of natural environments has not only led to greater awareness, but also the need to do something, and to do something about it now.

Socially responsible investing provides a platform and an opportunity to the investor to fulfill their financial needs, and at the same time, to consider the impact of corporations on society.

Approaches involved in Socially Responsible Investing

Screening: Investors involved in socially responsible investing necessarily go through the process of screening which involves both positive and negative screening of investments. The procedure entails extensive evaluation of company compatibility with various criteria. These range from environmental concern to animal rights, and weapons manufacture, to employee benefits.

Negative screening generally excludes those investment avenues and companies whose policies and practices are considered harmful for the social environment. Generally companies involved in manufacture and sales of products like tobacco, alcohol, gambling, and arms and ammunition, are filtered out in socially responsible investing (see Time to Bet on the Gaming ETF?).

While negative screening filter out companies that are not otherwise ‘good’ for society and environmental and social advancement, positive screening includes companies that positively contribute to, and benefit communities and natural environments. Additionally, this definition can also include firms that are taking a proactive approach to their environment, either by donating more, using sustainable practices, or are promoting human rights both at home and abroad.

Shareholder Advocacy: Shareholders are the owners of the company to the extent they invest in the company. Many investors who believe in social investing utilize their rights in the company to advocate their concern, whether it be related to wages or any other socially responsible issue.

This group express themselves through dialogue with company management, shareholder resolution, – or divestment to opt out. These means of approach can thereby represent three levels of engagement (or the decision of not wanting to). There is one ultimate objective, – of making management and other stakeholders aware. In this instance, the stakeholders could be customers or employees, vendors or even communities and other stockholders.

Community Investing: Community investing is third way of socially responsible investment. Though traditional lenders do not provide loans to those on low incomes, non-profit institutions like community development banks and credit unions support are known to support them by providing loans to finance small business or to buy a home. Community investing is by far the most well-known way of socially responsible investing (see Does Your Portfolio Need a Financial ETF?).

Socially responsible investing has gained popularity. Quite a few serious investors have adapted to this manner of investment as it aims to positively impact society and provide long term competitive returns. Socially responsible investing is widely practiced, with more than $3 trillion in assets under management, according to the 2010 Report on Socially Responsible Investing Trends in the United States.

Some also believe that consumers may be more drawn to these companies thanks to their more progressive platforms. Thanks to this, there is a growing belief that these companies could outperform their less forward looking peers, making firms that are socially responsible interesting investment choices.

Due to this, ETFs could be solid picks in the current market, especially for those looking for a broad swath of companies that possess socially responsible attributes. For investors seeking to make a play on this segment of the market, we have highlighted five quality options that could help to accomplish goals in this corner of the space:


GIVE is the most recently launched ETF in the category giving investors a new way to play the space. The fund is an actively managed ETF with an emphasis on sustainable long term capital appreciation as it invests across a variety of asset classes.

Market trends may not hamper the performance of the ETF either, as it seeks to keep very little correlation with the broad based equity, as well as bond market indexes. These include the S&P 500 and Barclays Aggregate Bond index.

The fund has assets under management of $5.2 million and trades with a paltry daily average volume which could suggest wide bid ask spreads.

GIVE seeks to invest its asset base in a range of asset classes under different strategies. These include equity securities, fixed income securities, depository receipts, and alternative investments (long/short hedging strategies).

It also includes other ETFs in its portfolio along with other synthetic instruments. Asset allocation includes cash 23%, fixed-income 22%, domestic equities 30%, foreign equities 19% and short exposure 6%.

The fund charges investors a hefty expense ratio of 1.70% annually, but donates 40 basis points out of that to the Global Echo Foundation, a charitable organization that works for a variety of social and economic issues (Guide to the 25 Cheapest ETFs). Thus, the product allows investors to directly impact a charity and invest at the same time with a single ETF.

MSCI USA ESG Select Social Index Fund (NYSEARCA:KLD)

Investors seeking to invest in the large cap equity companies with a view to social responsibility, can look to KLD. The ETF picks only those companies that have positive environmental, social, and governance characteristics relative to their industry.

The fund manages an asset base of $189.5 million and provides good liquidity with volumes at levels of more than 250,000 shares a day. The asset base in invested in total holdings of 147 stocks.

Company specific risk is low in the ETF, as just 25% of assets are invested in the top 10 holdings (Three ETFs with Incredible Diversification). Among individual holdings, International Business Machine Corp takes the maximum share of assets with 3.56%. This is closely followed by Apple and Starbucks. For this exposure the fund charges an expense ratio of 50 basis points annually.

Among sector holdings, Information Technology gets the first priority with 23.6%. Financials and Consumer Discretionary have shares of 17.06%, and 12.87% in assets, respectively.

MSCI KLD 400 Social Index Fund (NYSEARCA:DSI)

DSI ETF provides exposure to those U.S. equity companies that have positive environmental, social and governance characteristics. The fund manages an asset base of $171.8 million and trades with the volume of 4,200 shares a day. DSI charges an expense ratio of 50 basis points from the investor.

The overall basket of securities in the fund consists of nearly 396 companies with Information Technology (24.9%), Health Care (14.6%), and Consumer Staples (13.5%), accounting for the top three spots.

The fund appears to be well spread out as it invests just 27.9% in top 10 holdings. Among individual holdings, Microsoft Corp takes the top spot, followed by International Business Machine Corp and Johnson & Johnson with, respectively, 3.87% and 3.30% of the fund.

Pax MSCI North America ESG Index ETF (NYSEARCA:NASI)

Another fund which investors can consider for exposure to socially responsible investment is NASI which tracks MSCI North America ESG Index. The Index is a free float-adjusted market capitalization weighted benchmark designed to measure the performance of equity securities in the North American market.

This includes both firms in the U.S. and Canada, and in total, consists of just under 350 components. Much like the other funds on the list, this focuses on firms with high environmental, social and governance ratings relative to their sector and industry group peers of 16 as rated by MSCI ESG Research annually (Alternative ETF Weighting Methodologies 101).

Company specific risk is not much of an issue in the fund as just 4.4% of its asset base is invested in the top 10 holdings. From individual company perspective 3M Co, ACE Ltd and AFLAC Inc take the top three positions.

The fund charges 50 basis points of expense ratio annually. This makes it a relatively cheap choice in the segment, although that is also probably due to its more domestic focus.


The fund is much like its counterparts on the list but has a more European focus thanks to tracking the MSCI EAFE ESG Index. The benchmark consists of equity securities of issuers in Europe, Middle East and the Pacific regions that meet specific environmental, social and governance criteria developed by MSCI.

The fund manages an asset base of $9.1 million and trades with the volume of 8,500 shares a day. EAPS provides exposure to 142 stocks including top weights to Vodafone, HSBC Holdings, and GlaxoSmithKline.

The fund charges an expense ratio of 55 basis points annually, making it a decent choice for investors looking for more global exposure in a socially responsible way.

Written By Eric Dutram From Zacks Investment Research  

In 1978, Len Zacks discovered the power of earnings estimates revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank, a peerless stock rating system whose Strong Buy recommendation has an average return of 26% per year.

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