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September 07, 2006
Barclays Files for Permission to Launch iShares ETF Tracking the Domini Social Index
    by Bill Baue

The exchange-traded fund will likely have a low expense ratio, but will not conduct shareowner engagement like the other fund tracking the DSI, the Green Century Equity Fund, does.

The liberation of the Domini 400 Social Index (DSI) from exclusive licensing to the Domini Social Equity Fund (ticker: DSEFX--which is shifting to active management) has opened the door for multiple funds tracking the flagship socially responsible investing (SRI) index. Last month, Barclays Global Investors (BGI) filed a registration statement with the Securities and Exchange Commission (SEC) documenting its intention to launch the iShares KLD 400 Social Index Fund, an exchange traded fund (ETF) tracking the DSI.

Also last month, the Green Century Equity Fund (GCEQX) filed a preliminary proxy statement seeking permission from its shareowners to continue tracking the DSI by ending its investment in the Domini Social Equity Fund, which it had done for over a decade to gain exposure to the DSI. Green Century also lowered its expense ratio from 1.50 percent to 0.95 percent--the same rate charged by the Domini Social Equity Fund as an index-tracker. The Barclays filing does not disclose the intended expense ratio for its new ETF. The iShares KLD Select Social Index Fund, an ETF launched early last year that tracks a sibling index of the DSI also managed by KLD Research & Analytics, has an expense ratio of 0.50 percent.

"We generally favor the lower cost structure of ETFs over the higher expenses normally found in traditional SRI mutual funds," said Jeff Petersen, managing director of Petersen Hastings Investment Management. The firm's investment committee recently removed the Domini Social Equity Fund from its approved list due to the shift from index tracking to active management and the fund's increased expense ratio. "The maturity of the SRI market to include investment organizations such as Barclays will only continue to put downward competitive pressure on fees which we see as good news and overdue."

"This will not be good news to SRI mutual funds that charge what we would consider excessive fees--we would like to see the question asked of SRI investors whether it is socially responsible to charge mutual fund expenses in excess of 1 percent," Mr. Petersen told "The trade off of lower fees from traditional investment firms can be less attention on socially responsible advocacy including proxy voting, dialogue with corporations, and sponsorship of corporate resolutions."

Green Century has always practiced active shareowner advocacy with companies in its equity fund, and the shift to more direct share ownership described in its preliminary proxy statement only enhances Green Century's ability to engage with companies. Beyond dialogue with companies, Green Century actively files and co-files shareowner resolutions. The registration statement for the iShares ETF is silent on the issue of direct shareowner engagement, and Barclays representative Lance Berg confirmed that the company is prohibited by SEC regulations from commenting beyond the filing during the so-called "quiet period."

According to the registration statement, Institutional Shareholder Services (ISS) will vote the new ETF's proxies in accordance to a set of SRI guidelines Barclays established.

"The Fund maintains proxy voting guidelines consistent with the principle that 'socially responsible' shareholders are concerned not only with economic returns and sound corporate governance, but also with the ethical behavior of corporations and the social and environmental impact of their actions," the statement reads. "With respect to social and environmental matters, the Fund's proxy voting guidelines seek to reflect a broad consensus of the socially responsible investing community."

"The Fund generally supports social, workforce and environmental proposals that promote 'good corporate citizenship' while enhancing long term shareholder and stakeholder value and proposals that call for more detailed and comparable reporting of a company's social, workforce and environmental performance," the filing continues. "The Fund votes on the election of directors on a case by case basis . . . generally oppos[ing] slates of director nominees that are not comprised of a majority of independent directors and withholds votes from non-independent directors who sit on key board committees;

Green Century's proxies, which used to be voted by Domini and will in the future be voted internally pending shareowner approval in November, are cast according to the firm's proxy voting guidelines.

Based on the information available on funds tracking the DSI, it seems the choice between the iShares ETF and the Green Century fund may boil down to lower expense versus deeper shareowner activism.

"We will continue to provide our clientele with the information regarding both choices and let them make the final decision," said Mr. Petersen.


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