Though funds with environmental, social and governance themes are all the rage in the ETF world, ETFs with religious themes have struggled to gain the kind of traction they have in the mutual fund space, where funds catering to religious screens number in the dozens.
An early first wave of ETFs designed on those themes didn’t last. It included the JETS Dow Jones Islamic Market International Index Fund, run by Javelin Investment Management, and the suite of FaithShares funds for Baptist, Catholic, Lutheran and Methodist investors, which joined a general Christian FaithShares fund. That entire lineup folded in 2011, a year after the Javelin fund closed.
Some ETF industry watchers say conditions now may be better for faith-focused vehicles. The industry has matured, and there’s greater interest in passive strategies. Additionally, fund proponents say the faith-based ETFs 2.0 version are quite different from the failed first wave.
The questions remain: Are these just marketing gimmicks? Do they make investment sense for non-believers?
There are currently six ETFs focused on Christian values. The biggest is the Global X S&P 500 Catholic Values ETF (CATH), a large-cap domestic fund with $145 million in assets under management (through year-end 2018) and an expense ratio of 0.29%.
Inspire Investing, an impact investing firm in Hollister, Calif., has four ETFs: the Inspire Global Hope ETF (BLES), a large-cap international fund with $81 million in assets; the Inspire Corporate Bond Impact ETF (IBD), with $61 million in assets; the Inspire Small/Mid Cap Impact ETF (ISMD), at $45 million; and the Inspire 100 ETF (BIBL), a domestic large-cap fund with $40 million in assets. The first three funds all charge an expense ratio of 0.61%, while BIBL charges 0.35%.
The smallest fund in this category is the James Purpose Based Investment ETF (JPBI), a domestic large-cap fund with $2.9 million in assets and an expense ratio of 0.65%.
So far, there are no U.S. ETFs focused on the other major world religions. BlackRock has Islamic ETFs, but they trade in the U.K. and Europe.
Tom Roseen, head of research services at fund research firm Lipper, says these funds have recently brought some good news: Unlike other ETFs that saw outflows during this autumn’s market turmoil, faith-based ETFs continued to draw net inflows. That’s not a complete surprise, Roseen says, because socially responsible investors usually have more conviction and stay the course when their beliefs line up with their pocketbooks.
“If you are a faith-based person, you may say, ‘I know at some time when the sin stocks start outperforming, I may underperform,’ and they’re OK with that,” he says.
The CATH and BIBL funds are large-cap ETFs, and Roseen says large caps had most of the outflows during the autumn downturn, so the fact these ETFs bucked the trend says something about the people buying them.
And like other ESG-type funds, faith-based funds aren’t necessarily sacrificing performance for conviction. Although these particular ETFs don’t have long track records, Roseen points to the Amana Funds, a mutual fund family that follows Islamic Shariah law. These funds consistently outperform their benchmarks and have for some time. “Faith-based does make sense in many cases,” he says.
He says faith-based mutual fund investors were also rewarded following the market downturn in 2008—while other investors sold during the market swoon, faith-based investors stayed the course and were invested when stocks rebounded.
The lackluster market performance in late 2018 hasn’t been kind to markets, period, and faith-based ETFs were no exception. In 2018, the CATH fund’s 5.8% drop was slightly less than its benchmark, the S&P 500, which was up 6.2%. The BLES fund was down 12.8%, outpacing the 15.8% loss for the MSCI ACWI Equal Weighted Index. BIBL was down 6.8% while the S&P 500 fell 6.2%. ISMD fell 10.4%, outpacing a blended benchmark of 50% EWSC ETF (Invesco S&P SmallCap 600 Equal Weight Index ETF) and 50% EWMC ETF (Invesco S&P MidCap 400 Equal Weight Index ETF) on a price basis, which fell 12.8%. IBD dropped 1.1% while the iShares U.S. Core Bond Aggregate ETF (AGG) was down 0.1%. And JPBI slid 21.1% against the S&P’s 6.2% drop.
First Iteration
Considering the demand for ESG ETFs in general, coupled with the slew of religious-focused vehicles in the mutual fund world, why did the faith-based ETFs fail the first time around? Roseen has a few ideas.
“You’re just coming out of the 2008 period and people [had] kind of just thrown in the towel on everything. I think it was tough for some of those faith-based ETFs to get going.”
Robert Netzly, president and chief executive officer of Inspire Funds, posits that the FaithShares funds folded because, metaphorically speaking, they didn’t practice what they preached.
“We were really excited when they came out,” he says. “But when you dug into the funds, it was like a bucket of ice water on our excitement because the screening just wasn’t there.” He believes the funds didn’t go far enough in excluding companies that were involved in abortion, pornography and other products that traditionally go against biblical values.
Netzly claims there are 100 million evangelical Christians in the U.S., not including Catholics and others, who control $10 trillion in investments. (A Pew Research Center report in 2014 said that evangelical Protestants represented 25% of the U.S. population, which at that time was roughly 80 million people out of a total estimated population of more than 318 million. The most recent U.S. population estimate was approaching 329 million.) He adds there are limited options for this group if they want to align their portfolios with their beliefs, aside from actively managed mutual funds and other pricier vehicles.
The Inspire Funds are ESG funds, but unlike typical socially responsible funds managed with what he calls a more progressive and liberal bent, the values in the Inspire Funds “focus on biblical issues of morality held by all orthodox branches of the Christian family tree, including evangelical, mainline Protestant and Catholic denominations.”
While there are no specific scriptures tied to every theme, Netzly says an overarching scripture that helps guide Inspire’s selection process is 1 Corinthians 10:31— “So, whether you eat or drink or whatever you do, do all to the glory of God.”
“This scripture is a clear call to every believer to glorify God in every act and aspect of life, and that certainly includes our decisions about which companies to invest our money—God’s money—into,” he says.
Such passages guide Inspire’s investment selections. The firm chooses to include companies it sees as a “blessing” to their community, such as firms that cure cancer.
The stock selection process is based on those readings of scripture and various moral beliefs, including the idea that life begins at conception, Netzly says, citing Psalm 139:13—”For you formed my inward parts; you knitted me together in my mother’s womb.”
Screening Process
Jay Jacobs, head of research and strategy at Global X, which runs the CATH fund, says the ETF’s connection to faith is that it follows the guidelines of the United States Conference of Catholic Bishops. Some of those guidelines include screening out companies involved with abortion, contraception, pornography production, stem cell research and most weaponry. Those guidelines are similar to those of the Inspire Funds. These ETFs also focus on bioethics, the study of ethics surrounding medical advances, and that differentiates them from other ESG names.