ETFs: Performance of Socially Responsible Investments - dummies

ETFs: Performance of Socially Responsible Investments

By Russell Wild

Whereas investing in a socially responsible mutual fund or ETF may do the world some good, the question remains whether it will do your portfolio any good.

Proponents believe that nice companies, like nice salespeople, will naturally be more successful over time. Skeptics of investing with a social screen not only scoff at the notion of good karma but also say that limiting a fund manager’s investment choices could lead to lower performance.

So far, no solid evidence exists that either side is right — or wrong. Over the past decade or so, the collective performance of socially responsible mutual funds has been very similar to that of all other mutual funds.

It could be argued that a tie should be resolved in favor of socially responsible investing. If one can achieve market returns while at the same time prodding companies to improve their behavior, why not do that?

What about the specific performance of the socially responsible ETFs? To be blunt, they haven’t been around long enough for their collective performance record to count for much. And, of course, performance is only one factor to look at when deciding whether to recommend an ETF.

But if it matters to you, consider the performance of the oldest socially responsible ETF, the iShares MSCI USA ESG Select Index (KLD), founded in January 2005. KLD has a five-year annualized return of about 3.5 percent — pretty much on a par with the average large cap blend fund.

And (perhaps ironically) this performance is also on a par with USA Mutuals’ VICE mutual fund (VICEX), which seeks to invest in socially irresponsible companies!