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 3 of 3
An ETF "allows us to have a diversified position in alternative energy without having to place our bets on specific companies in various industries," Mr. Freund says. "It's particularly useful in our smaller portfolios – let's say, under $500,000 – where we can't necessarily buy locked shares of 10 or 20 different alternative-energy companies without using up so much of the portfolio that it changes the risk profile entirely."
At least six ETFs aim to profit from alternative energy, which Freund identifies as the sector his clients request more often than any other. Among the largest is the PowerShares Wilder Hill Clean Energy Fund, which has a market capitalization of more than $1 billion and claims a 12 percent return over the past year. Others are less than one year old, but they're attracting investment dollars despite their limited track records by specializing, for instance, in industries that cut down pollution from fossil fuels or develop renewable-energy sources.
Ethical investors with an interest in diverse funds have at times profited by getting into ETFs. Example: Barclay's iShares KLD Select Social Index Fund, which avoids tobacco stocks, is reporting a 19.8 percent return over the past year.
But Foley-Mendelssohn notes that cost-conscious investors can save money by going with indexed mutual funds, such as Vanguard's FTSE Social Index Fund, which tracks an index and doesn't rely on active management. Vanguard's product charges a 0.25 percent expense ratio, versus a 0.5 percent expense ratio for the iShares KLD Select Social Index Fund.
Potential tax benefits
Other considerations make ETFs worth a look in certain cases. Investors who need to keep their tax bills down in a certain year, for instance, may find that ETFs incur fewer capital gains than actively managed mutual funds because internal trades, which can trigger capital-gain expenses for investors, are rare with ETFs.
"The person who administers an ETF would only buy or sell holdings if the index they were tracking changed," says Bobbie Munroe, a financial planner with Fraser Financial in Atlanta. "This means that I have a lot more tax control over what happens for my clients by using ETFs."
On the whole, advisers are using ETFs in a range of ways to help socially conscious investors address unique circumstances and achieve highly specific goals. And investors can expect their options in this domain to keep expanding in coming years, Mr. Lydon says.
"The way ETFs are structured allows them to give more specialized offerings," Lydon says, "especially in areas where average investors have not had the opportunity to invest before, such as commodities, currencies, and precious metals.... They are popular for their transparency, liquidity, and tax efficiency. Because of this, providers are offering more for investors."
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