Index Investing the Socially Responsible Way
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In recent years the concept of socially responsible investing has been growing in popularity. This is the investment strategy of achieving good financial returns through ethical investing. This popularity is due to the increasing desire for investors to have investments that match their own personal beliefs, values, ethics and principles. Investors not only want to make money, but also have a clear conscience while doing so. But how does one go about accomplishing this?
With individual stock picking, socially responsible investing can be relatively easy, given a little time and patience. It is just a matter of doing your homework on a particular company to confirm that their products, services, business practices or corporate governance conform to whatever socially responsible criteria you personally use. Easy enough. Investing in an index fund however… that is another matter altogether.
Let us take a look at the SPDR S&P 500 ETF (NYSEMKT: SPY) for example. This exchange traded fund tracks the performance all 500 companies that comprise the S&P 500 Index. The SPDR S&P 500 and similar index funds are a simple and cheap way for investors to achieve a diversified portfolio that covers the many sectors and industries of the economy. Great for diversification, but not so great for socially responsible investing. The S&P 500 does include great socially responsible companies (as well as socially-neutral companies), but it also includes a host of companies that most socially responsible investors would certainly not invest in individually. There are ways, however, to get your ethical investing fix though a diversified ETF.
The two most popular and biggest socially responsible ETFs are the iShares MSCI KLD 400 Select Social Index Fund (NYSEMKT: DSI) and the iShares MSCI USA ESG Select Social Index Fund (NYSEMKT: KLD). These are the two best options for socially responsible investors. These two ETFs, however, are not so much about the companies that comprise the index, but more about the companies that do not comprise the index. Rather than creating an index that is explicitly socially responsible, they created an index that is explicitly NOT socially irresponsible. And they do a very good job in this regard. The result is that these two ETFs end up excluding the usual suspects that socially responsible investors typically avoid: the defense, weapon, alcohol, tobacco and gambling companies.
On to the specifics of these ETFs. The MSCI KLD 400 is the bigger of the two in terms of total holdings. Comprising the ETF are 398 different companies. Although the total holdings of the KLD 400 is more than that the MSCI USA ESG, the KLD 400 is also slightly less diversified in terms of the sector breakdown. This ETF is a little on the tech-heavy side. Its top ten holdings comprise five tech companies that make up a total of 15.05% of the entire index (Microsoft at 4.05%, IBM at 3.91%, Google 2.95%, Intel 2.33% and Qualcomm at 1.81%).
The MSCI USA ESG has fewer total holdings at 147. This ETF is also a bit tech-heavy, but to a lesser degree compared to the KLD 400. Its top ten holdings are also more diversified across seven different sectors. The top companies that comprise this index are IBM at 3.61%, Starbucks at 2.75%, Apple at 2.67%, Spectra Energy at 2.63% and Becton Dickinson and Co at 2.55%.
I am sure there are companies in these indexes that some investors would object to being called ‘socially responsible’. Not every investor will be able to agree 100% on what criteria should or should not be used (especially when we are talking about 147 or 398 different companies). But again, these ETFs are not so much about what they have, but rather what they do not have. And in that respect, I believe these are both successful in accomplishing their goal of giving investors the option of two diversified socially responsible index funds.
WhichStocksWork has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, International Business Machines, Intel, Microsoft, Qualcomm, and Starbucks. Motley Fool newsletter services recommend Apple, Becton, Dickinson and Co., Google, Intel, Microsoft, Spectra Energy, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.