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Fund Spy

Don't Expect These ETFs to Spark a Price War

Planned SRI ETFs won't provide low-cost, head-to-head competition.

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Competition from low-cost exchange-traded funds helped spur Fidelity Investments to slash prices on its in-house index funds earlier this month. Will the advent of socially responsible ETFs have the same effect on SRI index funds? Not in the near future.

The deals that most SRI index funds offer aren't horrendous, but they could be better. The average expense ratio for a passively managed SRI equity offering is under 1%. Still, funds such as Citizens 300 (CFCDX), Domini Social Equity (DIEQX), and MMA Praxis Value Index (MVIAX) are much more expensive than mainstream stock index funds. Those offerings could use a run for their money, but there currently are no SRI ETFs on the market to do so. That could change soon, but it's not yet clear whether the SRI ETFs seeking regulatory approval will put any pressure on SRI firms to cut their funds' expenses.

There are now scads of ETFs, such as iShares, StreetTracks, Spiders, and Vipers, offering investors a cheaper way to get exactly what Fidelity offered. This threat is what prompted Fidelity to respond with lower costs. The SRI ETFs proposed so far (at least two have registered with the SEC this summer) don't present the same challenge, however. They won't offer investors the same exposure as existing open-ended funds and they won't offer it for rock-bottom prices either. Furthermore, it's far from certain that these new SRI ETFs, PowerShares Wilder Alternative Power Technologies Portfolio and the iShares KLD Select Social Index Fund, will prove to be compelling alternatives.

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.