More ETFs aim to please the socially minded
Two new exchange traded funds are geared toward alternative energy firms and pressuring for reform in Sudan.
from the July 23, 2007 edition
Page 2 of 3
Pros, cons of ETFs in short term
Consider the case of the short-term investor. Funds earmarked for just a few days, weeks, or months in the stock market would potentially be well suited to an ETF because, unlike many mutual funds, they don't charge a redemption fee as a penalty for short-term trading, according to Nathan Foley-Mendelssohn. He's a securities analyst for Boston Common Asset Management, a Boston money-management firm with a focus on social responsibility.
"For investors who, for reasons related to liquidity, need short-term exposure to particular asset classes, ETFs are very useful and have inherent advantages over mutual funds," Mr. Foley-Mendelssohn says. He notes that mutual funds trade only at their end-of-day price, which can make quick, profitable moves difficult to achieve.
But short-term investors who aren't constantly monitoring market gyrations may want to avoid ETFs, says Doug Wheat, a Northampton, Mass. financial planner with a specialty in socially responsible investing.
Mr. Wheat's reason: volatility. Because ETFs trade throughout the day, their values can quickly plunge, he says, especially when holdings are concentrated in a single industry or market sector. That may be fine for long-term investors who will hang in long enough to see prices recover, but those who can't wait may not care for such a ride.
"To the degree that ETFs are investing in companies that are small and where there's a lot of trading going on, it can make them very volatile," Wheat says.
Not everyone, however, worries about rapid market fluctuations for socially responsible ETFs. Values tend to move a lot in a single day or week when speculators are moving quickly in and out of an ETF, according to Angela Thomson, a financial planner in Lincoln, R.I. But, she says, those types of investors are busy elsewhere.
"You don't have hedge fund people going in and out of socially conscious funds," Ms. Thomson says. "It's not a glittery, sort of, 'Oh, I'm going to make a quick buck if I get into this socially conscious ETF.' It doesn't attract the wild riders."
Diversification for small investors
Volatile or not, ETFs serve a variety of purposes for ethically minded investors. Ron Freund, a money manager in Berkeley, Calif., has recommended ETFs to O'Hare, his client, in order to reduce the risks involved in his individual stock-picking habit. But for other clients, he says, that same type of ETF has served desirably to increase prospects for higher rewards (while also increasing risks) by boosting their exposure to alternative energy.
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