Trends in Mutual Funds and Exchange-Traded Funds

PRODUCTS OF SRI: Trends in Mutual Funds and Exchange-Traded Funds (ETFs) There are currently more than 250 mutual funds that are designed to align investments with particular social values.

Some mutual fund companies, like Calvert, Domini, PAX World, Ariel, Sentinel, and Winslow, are solely focused on SRI.

On the other hand, more mainstream mutual fund companies, like Vanguard, Neuberger Berman, Gabelli, Legg Mason, and Dreyfus, to name a few, have one or more investment products that address specific social issues but are not solely focused on SRI.

While mutual funds are a good way to invest in a variety of businesses that embody particular social values, you should be aware of their limitations before making a purchase.

First, mutual funds typically have high costs. In addition to the fees for purchasing or selling shares, many mutual fund companies charge ongoing fees.

Second, mutual funds are a passive method of investing in SRI that do not control the companies that are chosen. You might be surprised to discover that some of the holdings of mutual fund companies that say they invest in socially responsible businesses are not really in line with SRI values if you take a closer look at some of them.

Finally, many mutual funds simply cannot compete with exchange-traded funds (ETFs), which are a straightforward, static product that track an index. The FTSE KLD 400, one of the first SRI indexes, has continued to perform competitively, with returns of 9.51 percent from its inception through December 31, 2009, compared to 8.66 percent for the S&P 500 during the same time period. You can simply purchase shares of an ETF that tracks the FTSE KLD 400 and perform just as well, if not better, than you would by investing in a mutual fund at a fraction of the cost.

There are currently approximately 26 ETFs available, and despite representing only 1% of SRI’s total assets, their assets have grown 225 percent since 2007, the fastest of any registered investment product.

Investing directly in the stocks or bonds of solid, financially sound businesses that align with your values might be a more straightforward approach to socially responsible investing.