February 01, 2005
Two Socially Responsible Investment Exchange Traded Funds Launch
by William Baue
The iShares KLD Select Social Index Fund seeks broad diversification and low risk, while the
PowerShares WilderHill Clean Energy Portfolio ETF invests in renewable energy companies.
Socially responsible investment (SRI) is commencing the new year by moving into a new arena:
exchange traded funds (ETFs), which resemble mutual funds by bundling securities but differ by
allowing trades all day to exploit market flux instead of setting net asset value (NAV) once daily.
Late last month, Barclays Global
Investors launched the iShares KLD Select Social Index Fund (ticker: KLD), which uses an
optimization technique to overweight and underweight companies based on social and environmental
performance, on the New York Stock Exchange (NYSE). And later this month, the American Stock Exchange (Amex) will begin listing the PowerShares WilderHill
Clean Energy Portfolio (PBW), comprised of companies that promote renewable and alternative energy.
While most SRI products use negative (exclusionary) and/or positive (best-in-class)
screens that limit diversification and introduce risk, the KLD Select Social Index (upon which the iShares
ETF is based) minimizes risk while retaining broad inclusion across all sectors (except tobacco).
Instead of screening, the index overweights companies with strong social and environmental
performance and underweights companies with weak sustainability performance, thereby answering
mainstream institutional investors' call for wide diversification and risk minimization. Such
optimization tilts the index in an ethical direction that may also positively impact financial
performance, as empirical academic studies in aggregate correlate strong corporate responsibility
performance with strong corporate financial performance.
"In the past, SRI funds have
focused on values-based investors--those who do not want to hold companies or sectors for ethical
reasons," said Peter Kinder, president of Boston-based SRI research firm KLD Research & Analytics. "These investors tend to be willing to
give up some diversification and some return in exchange for consistency with their values."
"More recently, we've seen growing interest from investors who want to take advantage of the
insights of social analysis but are more risk averse than values-based investors," Mr. Kinder
continued. "Their interest led KLD to devise a portfolio approach that addresses both their
fiduciary concerns and their wish for greater exposure to companies that rate highly on particular
The index is comprised of approximately 250 to 350 large capitalization
companies drawn from the S&P 500 and the
Russell 1000. The
latter serves as the index's benchmark, with a tracking error (or deviation) of less than two
percent instituted for additional risk control. The index's top three holdings (as of December 31,
2004) were Wells Fargo (WFC), Microsoft (MSFT), and Procter & Gamble (PG).
From its June 2004 inception until December 31, 2004, the KLD Social Select Index rose 9.63
percent, slightly lagging its benchmark, as the Russell 1000 gained 9.75 percent over the same
period. The iShares KLD Select Social Index Fund carries an expense ratio of .50 percent, and is
widely available through brokerage firms, financial advisors, and online brokers.
corporate responsibility analyses evaluate performance on environmental, labor relations, community
relations, diversity, product safety, human rights, and corporate governance arenas, in addition to
promoting strong sustainability reporting through its proxy-voting guidelines.
to the broad diversification of the iShares KLD ETF, the PowerShares WilderHill Clean Energy
Portfolio ETF focuses on companies that support renewable and cleaner energy production. Managed
by PowerShares Capital Management, the
ETF tracks the WilderHill Clean Energy Index (ECO), a portfolio comprised of 37 companies listed in the
US that ply in green energy, such as wind, solar, and hydrogen fuel cells.
The top three
holdings in the index (as of February 1, 2005) are Distributed Energy (DESC), a company that produces
hydrogen and fuel cell technology among other renewables, Evergreen Solar (ESLR), a solar panel producer, and
Zoltek (ZOLT), a
carbon fiber company. Since its August 16, 2004 launch, the ECO index has risen 25.4 percent.
The PowerShares WilderHill Clean Energy Portfolio ETF is slated to launch around February
23, according to Dr. Robert Wilder, managing director of WilderShares, which manages the index in
collaboration with Amex.