DSI has outperformed the iShares Russell 1000 and the S&P 500 over the past year and on an annualized basis the past three years, according to Morningstar. Meaney expects green energy ETFs to come back in favor. For now, "we've got a lot of cross winds battering alternative energy stocks," including shrinking alternative energy subsidies in Europe and relatively lower oil prices, he says.
Owning a basket of alternative energy companies is not for the fainthearted since many are banking on one innovative product, notes John Gabriel, an ETF strategist with Morningstar. "It's a boom or bust type industry; they won't all survive," he says.
Gabriel encourages investors to review ETF holdings to see if they meet their own ESG comfort zone. For example, a top holding of the iShares FTSE KLD Select Social Index Fund (KLD) is Chevron Corp., the U.S.'s No. 2 oil company. "You do have to look under the hood. You can't stop at the name," he says. Investors should also be aware that while socially responsible ETFs sport lower fees than mutual funds, there's still a premium over plain vanilla ETFs, he says.
"ETF education is not just a short process," says Tom Lydon, president of Irvine, Calif.-based registered investment advisor Global Trends Investments and editor of information Web site ETFtrends.com. "The industry is evolving, there are new players, new regulations, new strategies-so it's important for advisors to make sure they keep up with these evolutions as they occur." Although there are currently no socially responsible leveraged or inverse ETFs, he suggests learning how these more volatile funds work.
Lydon, author of The ETF Trend Following Playbook, says ETF providers such as iShares, PowerShares and SPDR State Street Global Advisors have comprehensive education sections on their Web sites. Many also host webinars and conferences. Pax World will offer webinars and more tools through ESGshares.com, says Keefe.
"Financial advisors should look at how their clients' current level of allocation will fit with a socially responsible ETF, as well as their goals," says Lydon. If someone doesn't want to own a socially responsible fund but wants exposure to some socially responsible companies, a tech fund such as the Technology Select Sector SPDR ETF (XLK) or the iShares Dow Jones U.S. Technology Sector Index Fund (IYW) could provide that, he says.
Don't expect actively managed green ETFs anytime soon. "We're really sort of in the infancy of the product; I think it'll take some time for it to catch on," says Stuart Strauss, a partner in the Financial Services Group at law firm Dechert LLP. Strauss helped PowerShares Capital Management LLC win SEC approval in 2008 for the first actively managed ETF and drafted prospectuses for several of its green ETFs. A big hurdle he sees: manager reluctance to disclose fund holdings on a daily basis.