In recent years, ETFs have been the ultimate growth industry. In 2009 more than 120 new products hit the market, and the first quarter of 2010 saw nearly 60 new launches. While some of these new products are “plain vanilla” funds competing directly with existing ETFs, the bulk of expansion in the space has been attributable to innovation, not duplication. The universe of accessible asset classes has been expanding while the granularity of exposure available has also surged. Hedge fund replication ETFs, sector-specific China and emerging markets funds, state-specific products, and volatility ETNs are just a few of the numerous new developments in the ETF space.
Another interesting innovation in the ETF industry is the development of faith-based funds. A handful of these ETFs have popped up over the last year, each seeking to replicate the performance of an index constructed in accordance with guidelines and principles of various religious groups.
The concept of faith-based funds is commonly misunderstood by ETF investors. An affiliation with a religious entity isn’t a requirement for inclusion in the underlying indexes; rather dealing in certain areas may be grounds for exclusion. In general, faith-based ETFs exclude stocks of companies engaging in activities that conflict with religious tenets. So you’re unlikely to find any stocks linked to gaming, tobacco, alcohol, or pornography in any of these funds. Certain pharmaceutical companies are also on the “do not invest” list because of their involvement in contraceptive drugs and stem cell research.
The constituents of faith-based ETFs include several well-known stocks, almost all of which have no religious affiliation whatsoever. For example, among the largest components of the FaithSahres Christian Values ETF (FOC) are Aflac, Starbucks, and American Express. The differences between various faith-based ETFs are generally subtle, and as such these funds generally have a high correlation with one another. Currently, the universe of faith-based ETFs includes six funds:
- FaithShares Baptist Values Fund ETF (FZB): This ETF tracks the performance of the FaithShares Baptist Values Index, a benchmark with a “zero tolerance policy” for companies involved in gambling, tobacco, alcohol, pornography, and abortion.
- FaithShares Catholic Values Fund ETF (FCV): This fund tracks the FaithShares Catholic Values Index, a benchmark that screens companies in accordance with the Catholic Bishops’ Socially Responsible Investment Guidelines. Companies are evaluated on their Catholic Values, which include respecting human life, reducing arms production, and protecting the environment.
- FaithShares Christian Values Fund ETF (FOC): This ETF is linked to the FaithShares Christian Values Index, a custom benchmark that measures the performance of large cap stocks screened based on a composite of guidelines of various Christian denominations.
- FaithShares Lutheran Values Fund ETF (FKL): This ETF tracks the FaithShares Lutheran Values Index, which avoids companies involved in harmful products and services, nuclear military weaponry, and hazardous environmental impact.
- FaithShares Methodist Values Fund ETF (FMV): This ETF tracks the FaithShares Methodist Values Index, a benchmark constructed in accordance with the investment philosophy of the Methodist Church.
- Dow Jones Islamic Market International Index Fund (JVS): This ETF tracks the Dow Jones Islamic Market International Titans 100 Index, which is maintained in accordance with principles of Islamic law. A supervisory board made up of internationally recognized Shari’ah scholars reviews the fund’s investment decisions, which generally avoid alcohol, conventional financial services, pork related products, and firearms.
Most of these funds don’t have a very long operating history–JVS was launched in June 2009 and the rest of the funds in December. So far, they’ve been relatively slow to gather assets, perhaps in part because of the lofty expense ratios compared to other options for large cap U.S. and international exposure.
|Ticker||ETF||Q1 Performance||Largest Holding|
|FZB||Baptist Values Fund||5.2%||Nordstrom|
|FCV||Catholic Values Fund||5.6%||Southwest Airlines|
|FOC||Christian Values Fund||5.8%||Nordstrom|
|FKL||Lutheran Values Fund||5.3%||Nordstrom|
|FMV||Methodist Values Fund||5.7%||Nordstrom|
|JVS||Islamic Market Index Fund||0.6%||BP PLC|
In the first quarter of 2010, each of the aforementioned funds delivered some impressive results. With the exception of JVS, all the funds in the adjacent table outperformed the SPDR S&P 500 ETF (SPY), which was up about 5.0% in the first quarter.
The gap between JVS and the FaithShares products is explained partially by Islamic fund’s exclusion of financial companies, which have been one of the top-performing sectors to date in 2010.
Good vs. Evil
These faith-based funds may have outperformed the broad market, but they lagged behind some investment products at the opposite end of the morality spectrum. The Vice Fund (VICEX), a mutual fund that targets stocks of tobacco, alcohol, gaming, and weapons/defense companies, added about 6.3% in the first quarter, putting it ahead of all the faith-based mutual funds. And the vice-centric Gaming ETF (BJK), which invests in stocks of companies engaged in the global gaming industry, has also raced ahead to start 2010. BJK gained 10.4% in the first quarter, as the outlook for one of the ultimate consumer discretionary products brightened considerably.
The moral of the story? For investors, sin is in (or at least it was in Q1).
Disclosure: No positions at time of writing.