Looking to expand its footprint in the still small field of socially responsible exchange-traded funds, BlackRock's iShares unit in March filed for what looks to be the first human rights-focused ETF.

The iShares Human Rights Index Fund would join just four other broadly diversified ETFs that use environmental, social and governance (ESG) screens to pick investments. That list includes BlackRock's own iShares KLD 400 Social Index (DSI) and iShares MSCI USA ESG Select Index (KLD). Both funds have reeled in respectable assets flows, with recent amounts of $173.9 million for DSI and $190.7 million for KLD.

But the two other broad-based SRI ETFs--both offered by Pax World--remain tiny. The Pax MSCI North America ESG Index ETF (NASI) had recent assets of $10.4 million and the Pax MSCI EAFE ESG Index ETF(EAPS) had $8.2 million.

While an ETF focused on human rights issues has raised questions about how much value the screens offer, iShares is looking to capitalize on the continuing popularity of SRI investing. Assets in socially responsible mutual funds rose 25% to $69.8 billion on March 30, just shy of the record $70 billion in assets in April 2011, according to Morningstar.

"The iShares Human Rights ETF reflects a growing desire by investors to align their investments with their values," says Joe Keefe, president and CEO of PaxWorld Management in Portsmouth, N.H. "We think a lot of new ESG ETFs are coming down the road."  

The iShares Human Rights Index Fund takes a different approach to the category of SRI funds.  The underlying index aims to exclude companies that provide material support for controversial regimes or governments that are subject to widespread sanctions based on human rights violations. At this time, governments in three countries-Sudan, Iran and Burma-meet those standards, according to MSCI, which created the index for BlackRock in November 2011.

"Material support" includes significant involvement with these governments' security forces or strategic industries such as energy and mining. Companies may also be excluded for actions taken by their own employees, private military forces or civilian contractors.

The selection universe for the human rights index is the MSCI All Country World Index (ACWI), which comprises large- and mid-cap companies in developed and emerging markets. As of March 30, there were 2,430 equity securities in the MSCI ACWI. Based on the human rights criteria developed by MSCI, between 50 and 60 stocks generally are eliminated from the index, according to Thomas Kuh, executive director at MSCI. The index will be reconstituted quarterly at the end of January, April, July and October.  

Among the companies excluded in the latest iteration of the index are PetroChina, whose parent company, China National Petroleum Corp., provides extensive support to the oil, natural gas and refining industries in Sudan; Hyundai Heavy Industries of South Korea, which provides oil tankers and equipment for oil refining operations to the government of Iran; and Barrick Gold, whose security forces have been accused of human rights violations at mining operations in Papua New Guinea and Tanzania, according to MSCI.

As is common in SRI portfolios that use environmental, social and governance screens, many of the companies on the excluded list operate in the energy and materials sectors of the economy. For example, the iShares KLD 400 Social Index fund, which is based on the MSCI KLD 400 Social Index, has positions in basic materials, energy and utilities that are half the weight found in the S&P 500, while its technology and healthcare positions are at a third or more than the S&P 500.

Given that basic materials tend to be cyclical while energy and utilities are defensive, and that healthcare and technology generally balance each other out in terms of volatility, SRI funds tend to perform more or less in line with the broad market on a slightly less volatile basis. The iShares KLD 400 Social Index fund, for example, outperformed the S&P 500 by 1.72 percentage points in 2008 but had underperformed the index by 1.33 percentage points annually during the last three years.

SRI proponents like to argue that "doing good means doing well," but Morningstar ETF analyst Robert Goldsborough says the track record is mixed. "Our feeling is that SRI has the ability to do well, but whether its correlation or causation is very tough to tell," he says. As far as the iShares Human Rights ETF is concerned, he adds, "this is basically an ESG fund with a twist. I'm not sure the exclusion of human rights violators will show up in performance."  

The performance of the Human Rights Custom Index on MSCI ACWI, on which the new iShares ETF is based and which has been backtested to May 2006, has been very close to the parent ACWI index--21.5% annualized during the three years ending March 31, 2012, versus 21.4% for the index, according to MSCI. This is not surprising given that the stocks excluded from the HR Custom Index constitute just 3.97% of the parent index's market capitalization, Kuh notes.

"The benchmark is designed to provide broadly diversified global equity exposure that avoids companies with the most serious human rights concerns," he says.

Advisors who specialize in socially responsible investments welcome the prospect of iShares newest SRI entry. "Human rights, including worker rights, and the environment are very important issues for our clients," says Michael Lent, chair of the U.S. Social Investment Forum and chief investment officer of Veris Wealth Partners, a New York-based wealth manager that focuses on sustainable and responsible investing. US SIF is an association of fund companies, advisors and others dedicated to promoting SRI investing.

Given the cost advantages and trading flexibility of ETFs and the potential to provide clients with a broader array of socially responsible options, "I'm very happy to see this development," Lent says.

At the least, the new offering will provide socially conscious investors with a global equity portfolio in ETF form. "That's key," says Steve Schueth, president of First Affirmative Financial Network, an independent RIA that serves socially conscious investors in Colorado Springs, Colo. "The human rights theme is important to some people, but the fact that this will be a global equity ETF will be attractive to lots of people."

As far as iShares is concerned, Goldsborough offers that he would not be surprised to see more specialized SRI ETFs from the firm. "It has been very adept at slicing investment products into increasingly smaller slivers," he says. "My guess is they're not done."