The one area where Inspire differs from Global X is its screening out of companies that promote what Netzly calls “LGBT activism.” He says Inspire does not exclude companies that hire gay and lesbian workers.
“Where we draw the line is when a company makes a clear, discretionary decision to support the LGBT agenda. This includes items such as sponsoring a gay pride parade or giving money to an LGBT activist group,” Netzly says.
One company that offers transgender health-care benefits is AbbVie, which Inspire holds. Netzly says the Inspire Funds don’t screen out companies based on insurance plans. “In some states, it is legally required to offer these types of benefits and we do not equate a company offering a health plan that could potentially be used for a sex-change operation as a proof that a company has decided to engage in actively promoting the LGBT lifestyle. The reason is because with a health-care plan, it is the employee’s elective decision whether to get a certain procedure or not.”
The subadvisory firm running the James Purpose Based Investment ETF also screens out companies involved in abortion, pornography, alcohol, tobacco and gambling, as well as companies that promote LGBT living or are involved in entertainment that undermines family values.
Finding A Following
Faith-based ETFs are finding an audience, and assets are growing. Netzly says most of Inspire’s funds are bought by financial advisors and retail clients. The preliminary interest in the CATH fund was from small and midsize foundations and endowments, Jacobs says, but now more retail investors and financial advisors are investing in the fund. While faith-based funds are certainly open to all investors, Jacobs says they’re really geared to a targeted audience.
“When a financial advisor is building a portfolio for their clients, this is something that they can talk about with some of them and probably not with others,” Jacobs says.
It helps to know the niche.
“A lot of ESG funds are trying to be everything to everyone,” Jacobs says. “And ESG is very personal. Everyone has different values, and it’s hard to create a fund that’s going to appeal to everyone and have [that] kind of meaning to everyone.”
When James Investment Research’s JBRI fund debuted a year ago, it was called the James Biblically Responsible Investment ETF, but the firm changed the name (and ticker) because the term “biblically responsible” sounded a bit thorny, says company founder Barry James.
“There were a set of folks who were wondering, well, what does that mean? How do you reconcile this with the Bible? And my interpretation could be different than your interpretation,” James says.
The new name, the James Purpose Based Investment ETF, reflects a purpose-based investment philosophy where the companies are trying to use the shareholder’s funds for investments that are not controversial by typical Judeo-Christian traditional values. “I don’t know where one person’s line should or should not be as to what is acceptable and not acceptable,” James says.
Not Right For Everyone
Financial advisors who use these funds say they don’t use them for all their clients of faith. Crystal Langdon, a certified financial planner at Crystal Clear Finances in Latham, N.Y., says that, like any other investment, this one has to be right for the client. Even though most of her clients are devout Christians (she opens her client meetings with prayer), not all are ready to align their portfolios with their faith.
“There are some that will come in and say, ‘That’s nice, but I’m not ready for that. I don’t want to do value-based investing.’ And we don’t force them,” she says. “I think that’s important that everyone be met where they are.”
Some clients who use faith-based funds have their entire portfolio in faith-based investments, Langdon says, while others may just have a portion. And she does see a difference between these types of ETFs and broader, secular ESG ETFs because the faith-based ETFs focus on the moral aspect of investing.
“What might be moral for me may not be a big [deal] for someone else,” Langdon explains. “Some say, ‘Listen, I drink wine. I’m totally fine with wine. I don’t want you to screen wine out of my portfolio.’ Biblically responsible is more about, ‘these are my convictions.’”
What she likes about faith-based ETFs is she knows what the daily fund holdings are, something she doesn’t know with mutual funds. And these funds are more than just marketing, she adds. For example, Inspire Funds invests in Panera Bread because the company donates its leftover food to food pantries at the end of the night.
Like other ESG funds, faith-based ETFs have higher fees than plain vanilla index funds like the SPDR S&P 500 Trust (SPY). That said, the fees are lower than those of many actively managed mutual funds. Eric Dunavant, president and chief executive officer at Paradiem, a financial planning firm in Mandeville, La., says that before faith-based ETFs arrived it was difficult to justify the fees in faith-oriented mutual funds from a fiduciary standpoint.
“We would bring this to clients and we would have a real up-front conversation and say, ‘Look, this is almost double or triple what the industry average is from a fee standpoint. If your faith is that important to you, just understand where we may have trouble overcoming that fee level,’” he says about the mutual fund fees.
The clients he has in these funds are devout Christians; he notes that less than 5% of his secular clients are interested in faith-based investing.
Both Langdon and Dunavant say faith-based ETFs are designed to be core, long-term holdings, so clients invested in them must understand that the holdings occasionally fall out of favor.
Leap Of Faith?
Although faith-based ETFs fall under the larger umbrella of ESG investing, not all ESG investors are true believers.
Joey Fishman, a registered investment advisor at Ritholtz Wealth Management, helps manage the Portland Portfolio, a sustainability-themed version of the company’s core portfolio. Fishman says it’s harder to quantify success in a faith-based investment than it is in, say, an environmental ETF where metrics are available.
“As a data-driven shop, we need very specific measurements of success,” he says. “It’s really hard to do that when you’re a faith-based investor. Investing based on reasons that have nothing to do with valuation or potential risk of future return expectations is inherently problematic.”
He also believes the screens are too restrictive, to the point where diversification becomes an issue. When it comes to screening out companies that advocate for LGBT rights, Fishman calls it “a tough nut to crack.”
“Ninety-two percent of Fortune 500 companies have nondiscriminatory policies, and 82% specifically talk about gender identity,” he says. “Over half not only offer transgender health benefits, but also surgical procedures.”
He says faith investors may receive greater benefits from impact-type investments or philanthropic efforts at the local level. “Not only do you get a chance to see how those dollars are actually impacting your community, but if you’re lucky you’re going to build a series of relationships that will pay more than actual money over time,” Fishman says.
Lipper’s Roseen notes that even though the category of faith-based ETFs is smaller than its mutual fund counterpart, these products can make sense for a financial advisor who wants to add a faith-based component to a client’s portfolio.
“You still have the benefits of relatively low expenses, but you also have the benefit of a tax advantage,” he says. “Because of the cost [advantage over mutual funds], that means we’re going to pump up the return a little bit more.”
[Editor's Note: In late-January it was announced that the James Purpose Based Investment ETF (JPBI) was slated to close on February 5.]