Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some socially responsible companies to your portfolio but don't have the time or expertise to hand-pick a few, the iShares MSCI USA ESG Select Social ETF (NYSEMKT: KLD) could save you a lot of trouble. Instead of trying to figure out which socially responsible companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on socially responsible companies, sports a relatively low expense ratio -- an annual fee -- of 0.5%. The fund is on the small side, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has underperformed the S&P 500 over the past few years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why socially responsible companies?
Recent history has shown us that companies can actually save money while being better to the environment. Socially responsible companies can perform quite well.
More than a handful of socially responsible companies saw strong performances over the past year. Power management company Eaton (ETN -1.62%) surged 40%. In its last quarter, revenue jumped 42% over year-ago levels to a record $5.6 billion, while earnings per share rose 5%. Both figures, though solid, missed projections. Eaton's $12 billion acquisition of Cooper Industries is part of the reason for the boost (and management recently noted that four other acquisitions from last year are adding $600 million to revenue this year). The purchase has been boosting Eaton's competitive position, giving it some tax advantages. One drawback, though, is the additional debt Eaton took on. Its debt now tops $9 billion. It upped its dividend by 11% earlier this year, and it recently yielded 2.5%. It's working with its suppliers and contractors "to promote safety, reduce our collective environmental footprint and develop sustainable solutions."
Bio-analytic and measurement specialist Agilent Technologies (A -1.51%), up 37%, has some investors excited about its plans to split itself in two by late 2014, with the Agilent name attached to its life sciences, diagnostics, and applied-markets businesses, and the new company focused on electronic measurement technology. Agilent Technologies generates more than $1 billion in free cash flow annually and its top line has been growing, but its earnings have not been rising consistently in recent years. In its last quarter, revenue shrank by 3% (though Europe sales grew), as the company has been hurt by sequestration. Still, results exceeded expectations and sent shares up. Agilent stock yields just 0.9%, but its dividend is new, and was hiked by 10% last month and by 20% earlier in the year. The company has been increasing the energy efficiency of its products and expects its suppliers to follow socially responsible guidelines.
Natural gas specialist Spectra Energy (SE) popped by 27%. It has been inking some promising partnerships, and yields about 3.6%. In its last quarter, it topped expectations for earnings (which were up 64% over year-ago levels) but missed its revenue estimate (revenue rose 7%). It also announced a 10% dividend increase. It's expanding its natural-gas operations across New York, Florida, and the Gulf market and has significantly boosted the scale and length of contracts on its Express crude oil pipeline. Management aims to deliver $25 billion in growth projects by the end of this decade. Along with NextEra Energy, Spectra has been awarded a contract to build a $3 billion natural gas pipeline into Florida. Its climate-change commitments and achievements include reducing its air emissions by 10% between 2007 and 2011, and between 2007 and 2010 reduced its carbon dioxide-equivalent emissions by 4.3 million metric tons.
Procter & Gamble (PG 0.57%) is another company deemed socially responsible. It gained 22% and recently yielded 2.9%. The company has been struggling in recent years, but its former CEO is coming back to try to boost performance. The company is notably taking on Energizer Holdings and others in a shaving battle. Procter & Gamble is a longtime dividend powerhouse, generating billions in free cash flow domestically and abroad, with much hope pinned on faster-growing emerging markets. The company recently posted organic growth of 4%, and it aims to cut costs by some $10 billion by the end of fiscal 2016. Bears worry about price wars and currency risks. Among its socially responsible initiatives, it aims to eliminate animal testing.
The big picture
If you're interested in adding some socially responsible companies to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
