The fundamentals of SRI mutual funds, indices, and ETFs |
Written by SRIStocks.com
The SRI financial instruments have increased in socially responsible investing, social investing, sustainable investing, values investing, and green investing with many more socially responsible investment funds, socially responsible funds, SRI mutual funds, SRI ETFs, and SRI index funds available.
As the volume of socially responsible investors and investment dollars increases, so do the number of socially responsible investment vehicles. Whereas the seed of socially responsible investment tools began with the socially responsible investment funds, such as the Pax World Balanced Fund , it has now blossomed into ETFs and passively managed index funds. Choosing the right socially responsible investment option for you depends upon your financial needs and risk tolerance levels.
Actively managed SRI mutual funds
Twenty years ago, socially responsible investors were limited to socially responsible investment funds, such as the Pax World Balanced Fund and Domini Social Equity Fund . Today, the socially responsible funds still reign very powerful – and profitable – in the world of social investing.
The advantage of SRI mutual funds comes from their active management, which theoretically, helps the socially responsible investment portfolio adjust to any market fluctuations - either capitalizing upon new advancements or shielding against downturns.
However, this advantage comes at a price. The significant research, analysis, and management of socially responsible investment funds result in higher expense ratios and annual fees for the investor. In addition, considering that screening investments with SRI standards is research and time-intensive, socially responsible funds' costs can be more expensive than their unscreened counterparts.
Passive socially responsible index funds
With a similar diversification model as SRI mutual funds, socially responsible investment funds are designed to remain constant in their portfolio choices, regardless of market fluctuations. Thus, after a specific set of values investing screens and financial risk standards are set forth, the selected basket selection of socially responsible stocks does not change within the index fund.
The passive management of SRI index funds allows for lower expense ratios and front-end load charges; thus, the socially responsible investor is burdened with lower financial fees, as well as reduced taxes in taxable accounts. Socially responsible investment funds are considered to be a low-cost investment tool, but you do not receive the benefit of an actively managed fund in changing market conditions.
Growth in SRI Management, according to the Social Investment Forum
In the last decade, social investing has grown at a faster rate than all other types of managed assets. Socially responsible investments totaled $2.29 trillion in 2005, an increase of 258% from the $639 billion in 1995. In the same decade, managed assets overall grew less than 249%, from $7 trillion to $24.4 trillion. The assets in socially responsible investing has increased 18.5% in SRI mutual funds and 40% in community investments. The number of shareholder resolutions rose 16%.
Socially responsible ETFs
With the growing prevalence of socially responsible investing, ETFs have been introduced as an additional financial instrument - adding another dimension of trading sophistication for social investing.
There are several differences between open-ended socially responsible investment funds and SRI ETFs. ETFs generally have lower annual expenses and transaction fees than SRI index funds. If you want to buy or sell these ETFs, you would trade them like socially responsible stocks and simply pay the commission.
In addition, socially responsible ETFs do not require any minimum investment - allowing you to purchase just one share. ETFs also give you the freedom to enter and exit into a trade whenever you desire. Open-ended socially responsible funds, on the other hand, generally penalize you for early withdrawal from the fund. ETFs also have better liquidity than socially responsible investment index funds, as they are traded like equities throughout the day.
On the other hand, depending upon the specific socially responsible ETFs, your sustainable investing portfolio may be impacted by varying risk-to-reward ratios. For example, there are some socially responsible ETFs that are specifically dedicated to alternative energy, such as the Van Ecks' Market Vectors Global Alternative Energy (GEX) . Diversified across market caps and international borders, this socially responsible fund has risen 36% since its inception in May 2007. Keeping in stride with the risk-to-reward ratio, with these significant gains also come potential risks. Some analysts believe that as long as crude oil prices remain high, the value of alternative energy stocks and green investments will remain strong. However, if oil takes a dip, then the alternative energy will tumble as well – bringing down green investing picks involved with alternative energy socially responsible ETFs, such as the GEX.
SRI financial instrument selections
Actively managed socially responsible investment funds, passive index funds, and social investment ETFs all provide the socially responsible investor with diversification. However, choosing the right financial instrument depends upon your financial circumstances, goals, and socially responsible investment standards.
The actively managed SRI mutual fund is ideal for investors who have a large amount of free capital to invest. The generally high minimum investment requirements with socially responsible investment funds prevent some investors from capitalizing upon this financial instrument. In addition, the mutual fund is for an investor who believes that active management can generate higher returns for its increased expense ratios and fees.
Passive socially responsible index funds are geared for the investor who is seeking a social investing portfolio that tracks benchmarks, regardless of market conditions. This is ideal for a social investor who believes that long-term success stems from passive investing, as this strategy ignores any short-term fluctuations. Again, these SRI index funds' minimum investment requirements are also geared for a socially responsible investor who has at least $300,000 to place into a pooled fund, or $1,000,000.
On the other hand, ETFs give any investor, regardless of the capital size, to benefit from values investing with a higher Sharpe ratio. With an ability to buy only one share, any investor can trade socially responsible investment ETFs - and gain the same instant diversification benefits as the sustainable investing funds. With increased liquidity and standard market trading, socially responsible investment ETFs are great for an investor seeking instant market exposure and varying risk-to-reward ratios. In addition, for an active short-term and momentum socially responsible investor, ETFs provide a great instrument for socially responsible investing.
Socially responsible investment funds, index funds, and social investing ETFs can all be utilized in conjunction in a values investing portfolio. For example, a SRI mutual fund investor who is seeking additional market exposure can utilize social investment ETFs to round out the portfolio. With individual benefits and disadvantages, each socially responsible investments financial instrument serves a different type of investment rationale or capital requirements - all while offering instant diversification for social investing.
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