Early in 2005, two exchange-traded funds came to market that could meet the needs of investors who wanted to invest with their consciences. Barclays Global Investors (BGI) was the first to hit the market with its iShares KLD Select Social Index Fund
A tale of two funds
KLD has struggled and only has $61 million in assets, while PBW has gathered more than 10 times as much with more than $650 million. KLD has a moderate .50 expense ratio, and PBW's expense ratio is .71. Year-to-date returns on PBW are around 11.74%, while KLD's return is slightly less, at 11.41%. Besides their size, these are two very different funds, and a closer look at each will tell you why.
KLD consists of approximately 300 to 350 companies from a universe of S&P 500 and Russell 1000 companies. The fund seeks to maximize exposure to large-capitalization companies that have positive social and environmental characteristics. Information technology and financial services each account for about 22% of the fund's assets, while non-cyclical consumer goods are roughly 20%. The fund's top five holdings include Johnson & Johnson
PBW can be considered an energy play, which goes a long way toward explaining why the fund has received so much more attention than KLD over the past year. Unlike the broadly diversified KLD, PBW is more condensed with only 43 holdings, and it focuses its investments on companies that support renewable and cleaner energy production. PBW tracks the WilderHill Clean Energy Index, which is comprised of companies in transition technologies that reduce the carbon or pollutants stemming from coal, oil, and natural gas; enhance efficiency; or make better use of the energy sources dominant today. Many of PBW's stocks are directly affected by energy prices.
PBW has more than 60% of its assets invested in small-cap growth companies. The fund's top five holdings include OM Group, Energy Conversion Devices, SunPower Corp, Medis Technologies, and Cypress Semiconductor. General industries account for 38% of the fund's investments, while information technology is 21%. With a limited number of holdings, expect this fund to be volatile. Another thing to keep an eye on is the portfolio's turnover, which is about 70% this year. The number of stocks being bought and sold could make it expensive to hold this fund in a taxable account.
Second-generation SRI?
Both PowerShares and BGI are rolling out new funds that could fit in a socially responsible investor's portfolio.
The PowerShares WilderHill Progressive Energy Portfolio is based on the WilderHill Progressive Energy Index. The index is comprised of U.S.-listed companies whose businesses stand to benefit substantially from societal transition toward the use of cleaner energy and conservation. Because the fund will include companies that improve the use of fossil fuels, as well as nuclear power, it may not meet the requirements of some socially responsible investors.
It has over 60% of its assets in small cap growth and value companies and its top five holdings include Headwaters, Tenneco, Aventine Renewable Energy, Chesapeake Energy, and Sasol.
The PowerShares Cleantech Portfolio tracks the Cleantech Index, which is comprised of U.S.-listed companies that have the greatest capital appreciation potential within the cleantech industry. A company is considered to be part of the cleantech industry if it produces any knowledge-based product or service that improves operational performance, productivity or efficiency, while reducing costs, inputs, energy consumption, waste or pollution.
Industrials make up 43% of the funds portfolio, while Information Technology is the second largest concentration at 27%. Its top five holdings, at close to 2% each, include Commercial Metals, Ballard Power, Medis Technologies, Evergreen Energy, and SunPower.
BGI has filed with the SEC to bring out the iShares KLD 400 Social Index Fund, an ETF that would track the Domini Social Index (DSI). The DSI is the first benchmark for equity portfolios subject to multiple social screens. It applies exclusionary social screens to the S&P 500, then adds stocks that pass positive screens to reach 400 constituents. The DSI has been in existence since May 1, 1990, and over that time period has an annual return of 11.87% versus the S&P 500's 11.2%.
Conscience or cash
Some investors will buy these funds for the returns, and others for their own peace of mind. If you are a socially responsible investor, you now have several options to choose from and more coming down the pipeline. If these ETFs don't meet your needs, there are several hundred socially responsible mutual funds to select from.
For more on ETFs, be sure to visit our ETF center.
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Fool contributor Zoe Van Schyndel lives in Miami and enjoys the sunshine and variety of the Magic City. She does not own shares in any of the funds or companies mentioned in this article. The Motley Fool has a disclosure policy.
