Are The New Impact ETFs Pro-Discrimination?

Socially responsible investing has been around for decades. While the results of social investing products has been somewhat mixed, there’s little question that these products fill a niche for certain belief-based investors. There’s definitely a group that wishes to avoid “sin stocks” that deal with gambling, alcohol, weapons, etc. and these products provide these folks with an investing product that aligns with their beliefs.

But different groups, of course, have different beliefs and different levels of acceptance. The presidential election has highlighted how differently the nation’s population feels about hot button issues. In the recent past, we’ve seen companies such as Chick-Fil-A and Hobby Lobby mix business with religion. Some have praised the companies for stick to their guns and managing the businesses in accordance with their religious beliefs while others have criticized their practices as overtly discriminatory.

And therein lies the rub. Where’s the line for running a business according to your own personal beliefs? How do we determine if that line has been crossed? Should there even be a line at all?

Which brings me to the new fund offerings from the Inspire Investing Group - the Inspire Small/Mid Cap Impact ETF (ISMD) and the Inspire Global Hope Large Cap ETF (BLES). The funds are managed with many of the same principles of their socially responsible investing predecessors, but look a little deeper and there’s one policy in particular that’s certain to rub more than a few people the wrong way.

Look at the fact sheets for the funds and you’ll quickly the sense that you’re investing with divine inspiration in mind.

• “We believe good returns and good values are not mutually exclusive.”
• “...designed to create meaningful impact by investing in some of the most inspiring companies from around the globe.”
• “All Inspire ETF’s meet biblically responsible investing (BRI) standards.”
• “...identify the most inspiring companies to invest in -- the kind of companies that are blessings to their communities, customers, workplace and the world.”
• “Invest with a smile knowing that your investments are making an eternal impact.”

Before I dive into the questionable stuff, it’s important to mention the good and honorable stuff that Inspire is doing. Inspire notes that it donates “50% or more of our corporate profits to worthy causes each year, such as drilling clean water wells, fighting human trafficking and alleviating human suffering.” There’s no doubt that Inspire is making a positive impact on the global community and for that alone they deserve a round of applause.

The prospectus points out the business activities that the fund stays away from. It’s largely the standard stuff such as alcohol, gambling, human rights violations and pornography. But then it also takes a stance on two very politically charged topics. It chooses to avoid companies that are engaged in abortion and those that support or have inclusive policies for the LGBT community.

That last one will no doubt cause a stir. Given how far many companies have come in their vocal support of anti-discriminatory policies related to race, religion, lifestyle and ethnicity, it makes me wonder how many companies, in fact, they’re going to be able to find that meet the criteria. Alas, the funds have found hundreds of candidates. The Large Cap ETF has nearly 300 holdings with some of the biggest including Vertex Pharmaceuticals (VRTX), Micron Technology (MU) and Lennar (LEN).

The fund portfolios are built on the company’s proprietary “Inspire Impact Score”, a method that assigns a company a score between -100 and +100 based on the company’s positive impact in four major categories - customer, workplace, community and world. Companies with a score above zero qualify for inclusion in the fund. The fund’s management team says on its website that “Inspire Impact Scores help us build portfolios of companies that are aligned with God’s heart for the world. Companies that are “loving their neighbor as themselves” and seeking to serve, rather than to be served.”

The Global Hope Large Cap ETF invests about 50% of its assets in the United States, 40% in international developed markets and 10% in emerging markets. The Small/Mid Cap Impact ETF splits its portfolio evenly between the two market caps. Neither the prospectus, the fact sheet or the website breaks down fund holdings by sector. The expense ratio on both funds is 0.61%. Although the fund has just launched, the index goes back to the beginning of 2012. Since that time, the index has returned 72% compared to a 94% return for the S&P 500.

Conclusion

Do these funds discriminate? There certainly seems to be an anti-gay sentiment to the funds. How much that policy affects the fund’s performance is unclear. The management team says it believes that investing in “inspiring” companies holds great potential to deliver superior returns although there seems to be little evidence of that in the past. The Domini Impact Equity Fund (DSEFX), one of the original socially conscious investing products (and formerly the Domini Social Equity Fund), started out on a good run but it now trails the S&P 500 by more than 1% annually since its inception in 1991. The FaithShares funds attempted some religiously responsible investment products but they no longer exist. The Global X S&P 500 Catholic Values Index ETF (CATH) is approaching its one-year anniversary with about $87 million in assets but still trades relatively infrequently.

While its focus on making a positive difference in the world is admirable, these funds are likely going to run into trouble gaining traction. That would be the case for any niche fund launched nowadays but the explicit exclusion of companies that are pro-LGBT is going to be a particularly sore spot for many. The funds’ impact in the world is likely to be much greater than the impact it has on the investing community.