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November 22, 2006
New Exchange Traded Fund Tracks Domini 400 Social Index
    by Bill Baue

Barclays Global Investors launches the iShares KLD 400 Social Index ETF.


Last week, Barclays Global Investors (BGI) launched the iShares KLD 400 Social Index Fund (ticker: DSI), the first exchange traded fund (ETF) to track the Domini 400 Social Index. The index has long been considered the premier socially responsible investing (SRI) benchmark. However, for over a decade-and-a-half an exclusive licensing agreement allowed Domini Social Investments to be the only SRI firm to offer mutual funds that tracked the index. The recent vote by Domini Social Equity Fund (ticker: DSEFX) shareowners to shift from passive to active management has opened to door for others to manage funds based on the Domini 400 Social Index.

In related news, Green Century Equity Fund (GCEQX) shareowners voted to keep tracking the Domini 400 Social Index, making it now the only mutual fund to do so. Previously, Domini Social Investments managed the fund for Green Century, but Domini's shift to active management for its own fund forced Green Century to regroup in order to continue tracking the index.

ETFs differ from mutual funds in several ways. ETFs tend to be less expensive, and like stocks they allow trading throughout the day, whereas the net asset value (NAV) for mutual funds is set only once a day, at the end of trading. The DSI is indeed less expensive--its expense ratio is .50 percent, compared to .95 percent for the Green Century Equity Fund (down from 1.50 percent before August 2006.)

"I think it's great that we're going to have a less expensive vehicle for tracking the index," said Lincoln Pain, a certified financial planner (CFP) in the First Affirmative Financial Network (FAFN), a consortium of SRI advisors.

ETFs' tradability opens the door to hedging (or reducing the risk of adverse stock price movements by taking an offsetting position in related securities), according to Judy Seid, a CFP and founding president of San Diego-based Blue Summit Financial Group.

"Somebody can trade options on an ETF where they can't otherwise--they can buy puts and sell calls so they can hedge," Ms. Seid told SocialFunds.com. "There are always going to be people who employ hedging strategies--now there is a vehicle to do this hedging with the Domini Social Index."

Ms. Seid posed the example of creating an SRI hedge portfolio using ETFs. Besides the DSI, there exist a handful of other SRI ETFs, such as the iShares KLD Select Social Index Fund (KLD), which weights companies based on their environmental, social and governance (ESG) performance and trades on the New York Stock Exchange (NYSE). Other SRI ETFs include the PowerShares WilderHill Clean Energy Portfolio (PBW), the PowerShares WilderHill Progressive Energy Portfolio (PUW) and the PowerShares Cleantech Portfolio (PZD), which trade on the American Stock Exchange (Amex) along with DSI.

However, Mr. Pain noted the irony that ETFs' tradability runs contrary to index-investing as well as social investing. Index-tracking tends to be a buy-and-hold strategy, and furthermore, social investors tend to "recognize the long-term damage from short-term thinking," according to Mr. Pain.

"There tend to be fewer day-traders in SRI, as social investors tend to focus more on the long-term effects of management on corporate behavior," Mr. Pain told SocialFunds.com. "Why would investors use a social index ETF as a short-term trading vehicle?"

"On average, SRI tends to underperform conventional investing in times of war and rising oil prices," he pointed out. " A social index ETF gives the opportunity to hedge against movements in energy--someone who isn't a social investor might take advantage of hourly movements in oil futures by trading the opposite on a social index throughout the day," he surmised.

This tradability highlights another distinction between the ETF and the mutual fund, as Green Century engages deeply in shareowner advocacy and actively votes it proxy ballots. While both the ETF and the mutual fund will maintain long positions in the companies comprising the Domini 400 Social Index, long-term SRI investors may find the mutual fund more attractive from an advocacy perspective.

 

 
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