85. Socially Responsible ETFs Offer Good Values

The ETF lineup consists of products that slice and dice domestic and international stock markets in just about every way imaginable. That includes funds that are designed to target stocks of "socially responsible" companies that maintain positive environmental, social, and governmental factors-basically, the companies that do things the right way. These ETFs can appeal to investors who have a problem investing in companies deemed to be immoral or unethical; they can be a way to focus on high quality companies without sinking in too much time and research.

Moreover, there is an interesting (and potentially compelling) investment thesis behind socially responsible ETFs. Companies that are model corporate citizens and strive to stay on the right side of the law are likely to avoid costly lawsuits and negative publicity while building loyal customer bases. Those can be key ingredients to a long-term business strategy, and can position these companies to experience long periods of sustained growth in profitability.

Some of the socially responsible ETFs include:

MSCI USA ESG Select Social Index Fund (KLD)
KLD 400 Social Index Fund (DSI)
ESG Shares North America Sustainability Index ETF  (NASI)
Europe MSCI EAFE ESG Index ETF (EAPS)

Bottom Line: For some investors, socially responsible ETFs may offer a compelling investment thesis.  
86. Understanding ETFs of ETFs

Most ETFs out there hold portfolios that consist of individual stocks or bonds. There are also a number of ETFs whose holdings are other ETFs, including many target retirement date funds and some of the hedge fund replication products. This is often the case when a product is designed to cover multiple asset classes or a huge number of individual securities; using ETFs to accomplish this can be more efficient that gathering each security individually.

There are a couple items to consider when evaluating these products. First, a quick look at the holdings may portray these funds as excessively concentrated. For example, EQL has just nine individual holdings-the sector SPDRs. But each of those has dozens of individual stocks, and EQL effectively offers exposure to 500 different securities.

Investors should also note the impact on fees; ETFs of ETFs effectively include two layers of management fees in the form of the explicit rate on the ETF and the rate charged by each component ETF (in some cases, the management fee will be waived). When you see phrases such as "Acquired Fund Fees," that generally refers to the expenses charged by components ETFs.

Bottom Line: ETFs of ETFs are a unique breed of products; make sure to carefully examine expenses and holdings when evaluating these products.