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Faith-Based Investing

by Cara Scatizzi

The number of faith-based mutual funds and exchange-traded funds (ETFs) has grown tremendously over the last few years.

These funds make investments based on the principles and teachings of a religion.

How It Works

Most faith-based ETFs and mutual funds (no matter the religion) avoid companies that produce alcohol, tobacco and pornography. Some funds have a much longer list of banned investments, including companies engaged in producing and selling firearms, those in the oil industry, those related to gambling and, at times, banks. Some funds avoid companies whose corporate culture they find disagreeable.

The level of strictness depends on the religious principles that govern the funds. These principles may differ from your personal beliefs. Individual funds within similar faith categories will also have varying levels of strictness.

These funds typically have investment strategies laid out in addition to the faith-based rules. Most fund companies offer growth and value strategies as well as capitalization-based strategies. Some also offer bond and other fixed-income funds.

Screening

Faith-based funds tend to be lumped together with all “socially responsible” investments. Using Morningstar’s Steele Mutual Fund Expert screening tools, we found 44 socially responsible mutual funds open to individuals. Narrowing the list to include only faith-based funds left us with less than 20 on the list.

However, this system is far from perfect, as certain fund families are not labeled by the program as socially responsible. After extensive searching we came up with a list of over 100 faith-based mutual funds (and six faith-based ETFs). While this may not include every faith-based fund, it encompasses the largest and most popular fund families.

You can use Morningstar’s Premium fund screener to search for these funds as well. However, the above-noted problem occurred online as well. An easier and quicker method would be to simply run a search on Google, or one of its competitors, using terms such as “Lutheran mutual funds” or “Lutheran ETFs.”

Types

Islamic

Islamic mutual funds invest according to Islamic principles requiring investors to avoid investments in businesses such as liquor, pornography and gambling. In addition, the religion of Islam forbids receiving interest payments. This prohibits investments in financial institutions as well as bonds and other fixed-income securities. Because of this, Islamic funds avoided the large losses of the financial industry.

Christian Faiths

There are fund families governed by general broad Christian beliefs, while others are more focused on specific religions within the broader faith. Almost all Christian-based funds avoid companies involved with pornography, weapons, gambling and alcohol.
Funds focused on a specific denomination may avoid other companies as well. For example, the Catholic-based funds typically exclude companies related to abortion, embryonic stem cell research and those deemed “anti-family.”

Other Religions

Through there may be funds based on other religions, we were unable to identify them. For example, though there are funds that invest in Israeli companies, there are no funds identified as investing strictly in accordance with the teachings of Judaism.

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Class Shares

Some of the faith-based mutual funds offer different classes of shares. For example, the Timothy Plan offers classes A and C shares for each fund. The difference between classes is the fees and expenses paid by investors. The Timothy Plan Aggressive Growth Class A fund shares have an expense ratio of 1.86%, while the Class C fund shares have an expense ratio of 2.61%.

In addition, Class A fund shares typically charge a front-end load, while Class C fund shares do not.

How to Invest

Socially based ETFs trade like any other exchange-traded fund. You can buy and sell them through your broker, paying the same commissions as you would for a stock. As with any ETF, you can buy and sell shares throughout the day.

You can also buy and sell some of the ETFs and mutual funds at online discount broker sites. If a mutual fund is not available for purchase through a broker, you can always purchase shares directly from the fund itself. Typically you will fill out a form and send a check for the first purchase; many of these fund families also have automatic investment options at their Web sites. Some fund families allow you to access account information online as well.

Table 1 lists the faith-based mutual fund families with their Web sites and phone numbers. Table 2 lists the ETF families and their contact information.

The Cons

Higher Expenses

Expense ratios tend to be higher for faith-based funds and ETFs. The average expense ratio for the funds listed in this article is 1.25%, while the average expense ratio of the over 1,400 funds tracked by AAII in the Quarterly Mutual Fund Update is 1.05%.

Cara Scatizzi is a former associate financial analyst at AAII.