Tree in hands

Scratching the Surface of Socially Responsible Index Funds

Tree in hands

National tragedies like the events of 9/11/01 inevitably cause people to reexamine values, and part of this process may include taking a fresh look at your portfolio.

So assuming you're not interested in the latest hot defense sector or bioterrorism play, let's take a gander at a few broad index funds that track benchmarks with social and environmental screens.

The Domini Social Index (DSI) 400 is an established socially-screened equity index that was launched in 1990. Billed as an S&P 500 benchmark for the socially and environmentally conscious, the DSI 400 is governed by rules that exclude companies that engage in military weapons, alcohol, tobacco, gambling, and nuclear power. As the name suggests, the index is a capitalization-weighted collection of 400 socially-screened companies.

The Domini Social Equity Fund, which is pegged to the DSI 400, was launched in 1991 and is the granddaddy of socially responsible funds. The fund has an expense ratio of 0.96%, which is rather steep if you use the Vanguard S&P 500 Index Fund, 0.18% expense ratio, as a yardstick. However, here's how the two funds stack up in terms of performance.

Fund
3 mo
1 yr*
3 yr*
5 yr*
10 yr*
DSI 400
-14.26%
-27.31%
0.90%
9.90%
12.20%
Vanguard 500
-14.72%
-26.70%
2.05%
10.20%
12.61%

Source: Morningstar data as of 9/30/2001           *annualized returns

Some folks might object to the S&P 500 comparison, claiming the S&P 500 isn't a true measure of "the market," and they may be right. After all, an index fund or exchange-traded fund is only as good as the index it tracks. So let's look at another large cap domestic option.

Morgan Stanley offers the KLD Social Index Fund. The screened index is managed by KLD Research & Analytics (which also created the DSI 400), and is comparable to the Russell 1000. The KLD Large Cap Social Index (LCSI) contains 700 companies that passed social and environmental screens, and covers 92% of the available U.S. market capitalization. The Morgan Stanley fund has expenses capped at 0.60%.

For those seeking an even broader screened index fund, there's good news and bad news. KLD does have a Broad Market Social Index (BMSI) based on the Russell 3000. However, as of yet there are no funds that track the index.

Although the BSMI and LCSI are relatively new - both were launched on January 1, 2001 - here's how they have performed relative to the indexes they're based on.

Index
YTD
BMSI
-24.10%
Russell 3000
-20.78%
LSCI
-24.84%
Russell 1000
-21.23%

Source: Frank Russell & Co., as of 9/30/2001

State Street and Barclays Global Launch New Foreign ETFs

State Street Global Advisors recently rounded out its family of MSCI European sector exchange-traded funds (ETFs) with the launch of three streetTRACKS tied to European industrials, materials, and utilities indexes. All three have expenses of 0.50% and began trading earlier this month on Euronext Paris.

As mentioned in a previous article, the American Stock Exchange (AMEX) began trading a broad Japanese iShares ETF based on the S&P/Topix 150 share index. Additionally, Barclays Global Investors launched three more iShares based on the S&P Latin America 40 Index, Goldman Sachs Natural Resources Index, and the MSCI Pacific ex-Japan Index. That brings the latest ETF count to 174 (excluding the HOLDRs), with 111 ETFs listed on the AMEX holding assets of over $67 billion.

Trick or Treat?

Faithful readers may remember my rant about Marketocracy, a website that allowed everyday folks to run virtual mutual funds with play money. Marketocracy compiled an index of the top 100 "managers," the m100 index, and dubiously boasted that it trounced (for a quarter) 94% of professionally managed funds.

Now, despite the fact that many "chat room" funds employing similar gimmicks have failed utterly, Marketocracy is launching a fund based on the m100 index. The Masters 100 Fund will have a real manager who uses ideas from the m100 index. The fund will launch on November 5, and until this Friday you can purchase shares at the subscriptions offering for $10 per share. Now that's scary stuff.