Faith-based investing is a gradually expanding niche of the exchange-traded fund market, and the largest and oldest ETF focused on Christian values is the $344 million Global X S&P 500 Catholic Values ETF (CATH), a U.S. large-cap fund that invests in companies that adhere to investing guidelines set by the United States Conference of Catholic Bishops.
That fund now has a sibling with today’s launch of the Global X S&P Catholic Values Developed ex-U.S. ETF (CEFA), which invests in large-cap companies in developed markets outside of the U.S., and whose business practices mirror the same standards as those in the CATH fund.
CEFA is based on the S&P Developed ex-U.S. Catholic Values Index that uses a three-step process to match exposures with Catholic investment guidelines while reducing tracking error to broad international equity benchmarks.
The first step entails screens to eliminate companies involved in activities deemed inconsistent with Catholic values. That list ranges from abortion-related activities and biological weapons to stem cell activity and adult entertainment content production. Most of these proscribed activities have a zero-tolerance revenue exposure level, though adult entertainment content re-selling has an exposure limit of 5% of a company's revenue, and the category of conventional military sales has a revenue exposure cap of 50%.
“If you set every tolerance level to zero you can inadvertently cut out bigger portions of the benchmark,” said Jay Jacobs, head of research and strategy at Global X.
In the case of the category of adult entertainment content re-selling, he noted, the 5% buffer enables on-demand media companies to remain in the index.
The second step in the investment process aims to reduce tracking error to international equity benchmarks by re-weighting index holdings to match the sector weights of the S&P EPAC ex-Korea Large Cap index.
And last, the index constituents are rebalanced quarterly.
For CEFA, the end result is a fund whose top-10 holdings include familiar names such as Toyota Motor Corp., German software maker SAP SE, spirits and beer company Diageo Plc and French beauty care company L'Oréal S.A.
CEFA’s expense ratio of 0.35% is slightly more than the 0.29% charged by the U.S.-focused CATH fund. But valuation metrics on CEFA’s portfolio—as measured by price-to-earnings and price-to-book—are lower than those sported by CATH, reflecting the recent outperformance, and some might say overvaluation, of the U.S equity market.