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ETFs Get a Conscience

An ETF option for the socially responsible.

Investors who want to feel good about where they put their money are no longer limited to mutual funds. There are already a handful of socially responsible exchange traded funds that allow people to invest with their conscience, and more are on the way.

PowerShares is currently the market leader, with three funds totaling nearly $800 million.

Barclays Global Investors, another major player in the ETF market, rolled out its second responsible offering on Friday, and First Trust Advisors is expected to launch its first socially responsible ETF in January.

"We are seeing a renewed emphasis on SRI

socially responsible investing," says Lipper senior research analyst Jeff Tjornehoj. "I think it's appropriate that ETFs are catching the wave at this time."

It's quite a wave. At the end of 2005, U.S. investors had some $2.29 trillion of assets invested in some kind of socially responsible investment product or account, according to a report from the Social Investments Forum. That was up from $639 billion a decade earlier.

All of the PowerShares offerings are focused on the environment. The firm launched

PowerShares WilderHill Clean Energy

(PBW) - Get Invesco WilderHill Clean Energy ETF Report

, in March 2005. The $709 million fund seeks to replicate an index that invests in companies focusing on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.

In October, PowerShares rolled out two additional ETFs with a similar bent. The $33 million

PowerShares Cleantech


(PZD) - Get Invesco Cleantech ETF Report

tracks an index that invests in companies that bring out products or services that improve operations, performance, productivity or efficiency, while reducing costs, inputs, energy consumption, waste or pollution.

The $31 million

TheStreet Recommends

PowerShares WilderHill Progressive Energy


is based on an index that currently invests in companies that improve the use of fossil fuels but also has a mandate to focus on cleaner or more renewable sources of energy once these become available.

There is also the $1.25 billion

PowerShares Water Resources Portfolio

(PHO) - Get Invesco Water Resources ETF Report

, which wasn't just designed as a socially responsible ETF, but also has an environmental focus. This fund invests in companies that focus on the provision of potable water, the treatment of water, and the technology and services that are directly related to water consumption, according to the prospectus.

"I think in general Americans are interested in new types of cleaner or renewable energies," said Bruce Bond, chief executive of PowerShares.

He said interest in the PowerShares products have increased since the Democrats regained control of the House and Senate in last week's elections.

Barclays Global Investors' first socially responsible ETF, the $73 million

iShares KLD Select Social Index


, has a broader focus than just the environment. It tracks an index that over-weights companies which have higher social and environmental performance and under-weights companies with lower social and environmental performance, relative to the Russell 1000 Index.

A second fund, the iShares KLD 400 Social Index Fund

(DSI) - Get iShares MSCI KLD 400 Social ETF Report

(DSI), was launched Friday. It also tracks an index that monitors the performance of 400 primarily large-cap companies that pass multiple, broad-based social screens.

Barclays spokesman Lance Berg said the iShares KLD provides "a more thoughtful portfolio approach to optimizing positive social and environmental criteria while seeking to reduce sector risk." He said the fund has attracted interest from both retail and institutional investors.

The next environmentally aware offering to hit the market will likely come from First Trust, which plans to launch an ETF tracking the NASDAQ Clean Edge U.S. Liquid Series Index. This index focuses on clean energy and will consist of companies that participate in manufacturing, development, distribution, and installation of emerging clean-energy technologies.

"As the world's economy shifts away from fossil fuel dependency towards efficient, renewable energy sources, investment opportunities are being created daily in this new industry," Nasdaq Executive Vice President John Jacobs said in a statement.

"This index, and the ETF based on it, will provide the tools needed to capture the investment opportunities created by this economic shift," he said.

It may be too early to say whether ETFs will ever be big players in the socially responsible investing world, however. Tjornehoj of Lipper notes that these products have been slower to catch on than some funds based on broader indexes. The analyst doesn't expect to see many more products rolled out unless investor interest picks up.