ETF Talk: Socially Responsible Investing — Ixnay on Vice

I have a soft spot in my heart for people who want to invest in socially responsible ways. Life is short and we have limited opportunities to make a difference in this world before our time on earth is up.

One of the great parts of having money to invest is that each of us can pick and choose where to put it. I have noticed that exchange-traded funds (ETFs) have been rolled out that cater to investors who want to deploy their resources to help fund companies that offer socially responsible products and services. If you dislike supporting gambling, tobacco use, alcohol consumption and other good things, oh, I mean other vices; you can do so and still enjoy the benefits of ETFs.

A local church representative recently contacted me and asked me if I could help him develop a socially responsible investment program. I was happy to receive this man’s call, and honored to be considered for this opportunity. I put time and research into helping this client and I want to share a little of what I learned about socially responsible ETFs.

Two solid socially responsible ETFs are the iShares KLD Select Social Index (KLD) and the iShares KLD 400 Social Index Fund (DSI). Both funds are part of the iShares family.

The largest sector held by each of the funds is technology. That sector actually has performed reasonably well during the recent market turmoil. Both funds also are diversified in a range of sectors to reduce their vulnerability to any one segment of the market.

The iShares KLD Select Social Index (KLD) is a fund that seeks to match its results to the price and yield performance, before fees and expenses, of the KLD Select Social Index. The fund, launched January 24, 2005, outperformed the S&P 500 since its inception through first quarter 2008, by notching a 16.47% cumulative total return. The S&P 500 returned 13.66% during the same period.

Imagine that. You can invest in companies that are socially responsible and still beat the market!

KLD’s top five sector holdings, as of May 30, 2008, were technology, 19.52%; consumer goods, 15.39%; financials, 14.58%; health care, 11.89%; and oil & gas, 11.16%. In addition, the fund’s top five stock holdings on May 30, 2008, were Johnson & Johnson, 4.49%; General Mills, 3.22%; International Business Machines, 3.06%; Exxon Mobil Corp., 2.68%; and Microsoft Corp., 2.41%. The fund has been trending upward during the second quarter, as the chart below reveals.

The iShares SKD 400 Social Index Fund (DSI) began on November 14, 2006, but it incurred a loss along with the S&P 500 since its launch at the end of the first quarter of 2008. Specifically, the fund’s share price fell 5.25% during that time frame, compared to the S&P 500’s drop of 5.06%. However, DSI’s performance has risen so far during the second quarter, as the chart below shows.

The DSI fund seeks results that correspond to the price and yield performance, before fees and expenses, of the Domini 400 Social Index. Its holdings, as of May 30, were concentrated in the following five sectors: information technology, 22.36%; financials, 17.49%; consumer staples, 13.49%; health care, 13.07%; and consumer discretionary, 10.39%. Its top five corporate holdings, also on May 30, were AT&T Inc., 3.94%; Microsoft Corp., 3.71%; Proctor & Gamble, 3.32%; Johnson & Johnson, 3.09%; and Apple Inc., 2.71%.

Although I have not recommended these two socially responsible funds in my paid trading services, I like them both. Those of you interested in socially responsible ETFs also may want to consider funds that mesh with your beliefs. A little research on the Web can help you to find ETFs that meet these objectives. Just be careful with any funds that lack much trading volume or that have underperformed the general market.

In closing, I recognize that I only address a segment of the ETF industry each week. If you have any general questions about ETFs, please send them to me and I’ll try to answer them in future ETF Talk features.

To encourage you to do so, I have created a new e-mail address. Send your questions here and you might just see your response featured in a future issue of the Making Money Alert.