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May 20, 2010
Pax World Launches Family of Sustainable Exchange Traded Funds
    by Robert Kropp

The exchange traded funds (ETFs) track the performances of indexes whose constituents are determined by KLD sustainability rankings.

The initial launch of what Pax World Management describes as “the first family of exchange traded funds (ETFs) devoted exclusively to a Sustainable Investing approach” occurred yesterday. The ESG Shares North America Sustainability Index ETF (NASI) tracks the performance of the FTSE KLD North America Sustainability Index, a diversified and sector-neutral global benchmark that is based on environmental, social, and corporate governance (ESG) rankings.

After evaluating the ESG performances of North American companies in an eligible universe consisting of companies listed on the FTSE All World Developed North America index, KLD, the investment research provider that was acquired by
RiskMetrics Group in November 2009, then ranks companies by sector peer group according to ESG performance.

The constituents of the FTSE KLD North America Sustainability Index, and thus of the NASI ETF as well, numbered 225 at yesterday’s launch.

Next week, Pax World will launch the two remaining members of the
ESG Shares family of ETFs. The ESG Shares Europe Asia Pacific Sustainability Index ETF (EAPS) will track the performance of the FTSE KLD Europe Asia Pacific Sustainability Index, while the ESG Shares FTSE Environmental Technologies (ET50) Index ETF (ETFY) tracks the performance of the FTSE ET50 Index, comprised of the 50 largest pure-play environmental companies globally, by market capitalization.

FTSE, which took over the ET50 from
Impax Asset Management in 2008, defines companies in the environmental market as those "that provide products and services offering solutions to environmental problems, or that improve the efficiency of natural resource use."

ETFs are open-ended funds that are traded on an exchange. Unlike mutual funds, ETF shares can be traded at any time while the host stock market is open. Since Standard and Poor's created its Deposit Receipt ETF in 1993, ETFs have experienced remarkable growth. By the end of 2008, there were approximately 750 ETFs with more than $500 billion in assets under management in the United States alone.

Although the Securities and Exchange Commission (SEC) authorized the creation of actively-managed ETFs in 2008, ESG Shares will be passively managed, in that they will track indexes.

While ESG Shares are not the first ETFs devoted to sustainable investing—
iShares manages the iShares KLD Select Social Index Fund (KLD) and the iShares KLD 400 Social Index Fund (DSI), which according to theETF Database, have “amassed more than $230 million in assets under management”—the Pax World products are “The first family of ETFs to be devoted to sustainable investing,” Joe Keefe, President and CEO of Pax World, told

For Pax World, which since 1971 has managed mutual funds that invest in companies with sustainable business models, its move into the ETF market “Is a new line of business for us, and it’s significant for a couple of reasons,” Keefe said. “ETFs are a fast-growing part of the investment landscape, not only for institutional investors but increasingly for investment advisors.”

“It builds on our investment platform,” Keefe continued. “Our mutual funds to date have all been actively managed funds. Now we’re managing a series of passively managed index funds as well.”

Asked about the advantages of investing in ETFs instead of mutual funds, Keefe said, “Some of the reasons for the popularity of ETFs are their lower cost, more favorable tax treatment, and the ability to do intra-day trading. ETFs have certain advantages over traditional mutual funds that are attractive to some investors.”

According to the ETF Database, “The fact that most ETFs are indexed…ensures that they will on average perform better than actively-managed mutual funds.” Additional advantages cited by the ETF Database include lower expense ratios, no investment minimums, lower taxes, and greater transparency.

The greater transparency of ETFs, which, unlike mutual funds, allow investors to see which securities are included, should help social investors assess the strength of the sustainability rankings themselves, as well.

“Investors who are interested in sustainable investing, and integrating ESG into their investment portfolios, now have available a family of ETFs that give them the broad market coverage as well as a focus on green technology,” Keefe said. “We think this family of ETFs provides a good starting place for advisors and investors.”


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