Technology enables a new era of faith-based investing
It's never been easier for investors to align their money with their values
It's never been easier for investors to align their money with their values. And not just environmental, or social, or governance issues either. There are now more ways to invest by the tenets of one's faith. Investors have access to Islamic exchange-traded funds (ETFs), Jewish mutual funds, and Catholic separately managed accounts (SMA), amongst more.
But like most personal beliefs, they tend to vary from one person to the next. Everyone observes religion differently; some may be devout followers, others less so. Using a pre-packaged fund, no matter how closely it tracks the rules of a specific faith, will never be able to capture all those variations. With advanced technology, however, advisors can create custom screens and portfolios that match an investor's religious commitment.
Faith-based investing has reached an inflection point where it's no longer less profitable or riskier than investing without a religious screen. As a result, these strategies are attracting a following not unlike that in sustainable investing. Some of the most common faith-based investments track Catholic, Islamic, or Jewish principles.
Elements of faith-based investing may seem arbitrary. Religion and religious scriptures, after all, are subject to interpretation. But there are, in fact, governing bodies who set the standards for what investments are and aren't acceptable. For Catholic investors, the United States Council of Catholic Bishops (USCCB) does that job. They've laid out six principles for socially responsible investing, some of which include reducing arms production and protecting the environment. Within each bucket are more specific rules around affordable housing, abortion, and racial discrimination, to name a few.
How those rules materialize in a fund can vary. The Global X S&P 500 Catholic Values ETF, a $545 million large-cap ETF that invests in companies that adhere to the principles set out by USCCB, for example, is just as top-heavy in the FAAMG names as the S&P 500 Index. The differences between the two lie in some of the smaller holdings. The faith-based ETF, for example, doesn't have any exposure to well-known healthcare companies—like Johnson & Johnson—found in the large-cap benchmark.
Investing in an Islamic compliant way starts a lot like a Catholic investment—that is, a governing body, this time the Accounting and Auditing Organization for Islamic Financial Institutions, sets guidelines for investors to follow. The Islamic faith, however, has different standards. For example, it prohibits backing companies that earn interest or have a considerable amount of debt on their balance sheet. What's more, a company can't derive more than 5% of its revenue from a prohibited source; tobacco and alcohol, for example. So an airline that sells in-flight alcoholic beverages could fall into this definition of an objectionable investment.
Those who invest in line with their Jewish faith embrace the principles found in religious texts. A common theme mentioned throughout, and what directs some Jewish-based investment strategies, is "to leave the world in a better place." As a result, many Jewish investment strategies seek to address climate change, social issues, and affordable housing.
Many faith-based strategies originate by screening industries and companies that violate specific values. A Catholic ETF may choose not to invest in firearms, an Islamic fund may have minimal exposure to banks, or a Jewish-compliant investment may favor green energy. Most off-the-shelf faith-based investments screen for all these factors quite well, sometimes too well. They will often leave little room for individual interpretation when in reality, there are many ways to practice a religion and invest in one.
A good way to capture all these differences is with technology. Modern investment platforms can screen and analyze hundreds of companies for specific criteria in less time than it would take a room of analysts. That way, investors can create screens that match their individual beliefs, whether they are devout observers who want minimal exposure to prohibited sectors or someone with a more open mind for how religion and investing mix.
The same platforms used to screen companies can also create and optimize portfolios using single securities. Doing so with single securities gives advisors and, more importantly, their clients the flexibility to change their approach at any time. So if a client's views on alcohol change, for instance, they aren't stuck in an ETF or mutual fund that can't change with them. This approach also unlocks a handful of other benefits.
The growth of faith-based investing comes at a time when more investors want to feel good about their investments, not just maximize their returns. Using technology can help ensure that anyone can invest in a way that matches their values and beliefs.
June 17, 2021