Faith Based ETFs: Investing with Conviction

In today’s investing world, many individuals simply choose the assets class (ex. Large cap) they wish to invest in and turn over the company picking to a mutual fund manager or an underlying index through  an index fund or Exchange Traded Fund (ETF).  However, when choosing individual stocks, an investor has the opportunity to screen out companies that they do not approve of, such as those that sell or promote pornography, alcohol, or gambling. The investor could also screen for a company that is environmentally conscious or encourages corporate responsibility.

Those investors looking to invest in ETFs, but still only desire to support companies within their values can now turn to a company called Faith Shares. Faith Shares has recently launched five new ETFs that invest with Christian values in mind. The company’s product line includes a Catholic Values Fund, Baptist Values Fund, Christian Values Fund, Lutheran Values Fund and the Methodist Values Fund.

All funds are built by selecting the 400 largest US companies. These companies are screened by the fund’s religious values and then ranked by their Environmental, Social and Governance (ESG) score by industry. The companies are then sorted by industry in a way that mirrors the FTSE US Index. The top 100 stocks will make up the fund, allocated at 1% each. The passively managed portfolios will be rebalanced and could have company changes each June.

This equal weighted approach to investing allows the funds to be non-cap size biased. In comparison, the S&P 500 (SPY) ranks companies by size, thus the investor has a larger portion of the mega size companies. The equal weighted approach (RSP) has outperformed the traditional S&P 500 weightings 1.54% to 0.41% over the last five years.  However, because the equal weighted approach allocates with smaller companies, there is additional risk. The five-year Standard Deviation of the S&P 500 is 16.0 whereas the equal weighted approach is 19.96 (as of 2/12/2010 comparing SPY to RSP as Faith Shares does not have an actual 5 year record).

The funds have virtually the same holdings with a few minor differences. For example, the Baptist fund is restricted to hold alcohol companies while the Catholic fund will. Investing with your values in mind certainly does not come without a price, though. The ETFs currently have an exceptionally high cost of 0.87% in annual management fees. In comparison, the S&P 500 index (SPY) is less than 0.10%. Faith Shares does donate 10% of its funds revenue to a charity and hopes to lower the fee as assets grow.

Faith Shares is also planning a launch of an international product in the near future. Currently, Faith Shares has the only Christian faith based ETF product line on the market. The company’s website nor third party sites show the size of the ETFs, so due to the newness of the funds we assume that the assets in each fund are less than $100 million. This throws up a caution flag. We can see that the daily trading volume of the funds is relatively low, so if you want to trade this ETF, make sure that you use limit orders based on the intraday value of the fund.

With proper trading techniques and a realization that these funds should complement a bigger asset allocation strategy, these funds should fit well with faith-based investors. My biggest issue is the fee. Hopefully with success, Faith Shares will do the right thing and lower the fee below 0.50%. Below 0.20% seems even more reasonable.