Are Socially Responsible ETFs the Best Answer?

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I feel strongly about socially responsible investing. But I'm a little bit ambivalent about some of the new exchange-traded funds being offered to conscientious investors.

For instance, some SRI activists have focused on the war in Darfur, trying to get mutual funds and other institutional investors to stop investing in companies that they link to genocide in the region. In 2007, shareholders of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) introduced a corporate resolution supporting divestment of such investments. Earlier this year, fund company TIAA-CREF created a similarly vigorous policy for its funds.

But I had mixed feelings upon learning of iShares' plans for a "genocide-free exchange-traded fund" (ETF). Given all the attention that Darfur's plight has received, I'm not surprised that the issue's spawning a specialized ETF, and I'm clearly in the target audience.

But as an investor, I started wondering: Does iShares really expect me to replace all my other stock investments with this single ETF? That seems like a bad idea for several reasons:

• You should never put all your eggs in one basket, no matter how appealing an investment might be.
• Although I know what the fund won't own, I don't yet know much about which stocks it will own. The odds are good that it won't address all my needs. I'd want a mix of lots of different stocks, from large-cap dividend payers like DuPont (NYSE: DD) and small-cap growth companies like Green Mountain Coffee Roasters (Nasdaq: GMCR) to international stocks like Garmin (Nasdaq: GRMN) and Arcelor Mittal (NYSE: MT).
• While this fund addresses concerns about Darfur, it may not deal with all the other issues important to socially responsible investors. Those who object to tobacco or gambling could shun the fund if it invests in companies such as Reynolds American (NYSE: RAI). Ethical investing is a complicated arena, and a single ETF simply won't handle all the issues.

A better solution
Rather than relying on an ETF or mutual fund to invest for you, the best way to be absolutely sure your investments meet your own unique standards for social responsibility is to pick them yourself. With the opportunity of the decade potentially before us, now's a good time to take charge of your investments -- no matter what issues matter most to you.