Faith-based investment manager Praxis Investment Management recently dove into the exchange-traded fund market by launching two new actively managed products that also use ESG factors.
The new ETFs, Praxis Impact Large Cap Growth ETF and Praxis Impact Large Cap Value ETF, began trading under the respective ticker symbols PRXG and PRXV on the New York Stock Exchange on April 8.
Mark Regier, vice president of stewardship investing and director of sales at Praxis, said Praxis has been in the mutual fund business for more than 30 years and now has five mutual funds with about $2.6 billion in assets. PRXG has about $1.4 million in assets, while PRCV has $1.2 million.
“For much of (those 30 years), shareholders preferred to work with financial advisers who typically used mutual funds to build portfolios,” he said. “In recent years, investors and their advisers have been choosing ETFs to access the markets because of their ease of purchase, and for taxable accounts, more favorable tax treatment.”
Faith-based investing, the alignment of religious values and financial decision-making, is becoming more popular and has converted to the exchange-traded fund industry.
According to an October report by BrightLight, an investment advisory firm, as of June 30, 2024, faith-based ETFs and mutual funds surpassed $100.8 billion in assets, a 13.4% increase from the year-ago date. ETFs accounted for about $5.4 billion of that figure.
“Faith-based investing, a distinctive approach that integrates financial goals with religious and ethical principles, has emerged as a noteworthy avenue for investors seeking to align their portfolios with their deeply held convictions," according to a research study published in September 2023 by Morningstar.
Such funds and ETFs are dominated by investments adhering to both Christian- and Shariah-based (Islamic) values. But while some 95% of the Christian-values funds have historically been launched from the U.S., Malaysia and Indonesia have accounted for the launches for about 60% of the Shariah funds. “Faith-based investing is not merely about exclusion but also about active engagement with companies that prioritize sustainability, social responsibility, and ethical practices,” Morningstar wrote.
This broader market trend has also influenced the way faith-based investors want to invest, Regier noted.
Although they are actively managed, PRXG and PRXV are somewhat similar to existing mutual funds Praxis Growth Index Fund and Praxis Value Index Fund, which trade under the respective ticker MMDEX and MVIIX. However, the ETFs are entirely separate investment vehicles.
Of the five mutual funds Praxis currently runs, four are index funds, while the other one, the $984.5 million Praxis Impact Bond Fund, is an actively managed fund.
Regier said their index mutual funds are not based on a specific index that avoids investments in such areas as gambling and alcohol, etc. “We believe that most investors, including faith-based ones, prefer to compare their performance to recognizable, non-screened indexes,” he said.
“The ETFs and mutual funds are similar in many ways but different also, based on ETF naming conventions (and) their status as non-diversified funds,” Regier said.
Regier explained that “our large-cap ETFs and mutual funds are managed in a similar way, however, the ETF marketplace views these products as either indexed or active while our ETFs are functionally a blend of the two. The inclusion of screens, sustainability factors with optimization back to the characteristics of a widely recognized benchmark means we don’t meet the naming definitions for an ‘index’ ETF.”
MMDEX has $550 million in assets under management, while MVIIX has $454 million. The expense ratios for both ETFs are 0.36% while MMDEX and MVIIX carry expense ratios of 0.35% and 0.37%, respectively.
The ETFs are benchmarked to the CRSP U.S. Large Cap Growth index and CRSP U.S. Large Cap Value index, respectively. Regier added Praxis currently has no plans to launch more ETFs this year.
Stewardship includes ESG
To select stocks for its various portfolios, Praxis uses a method called stewardship investing under which companies engaged significantly in the following activities are prohibited: abortions; adult entertainment; alcoholic beverages; recreational cannabis; ammunition and firearms; gambling; nuclear power; predatory lending; tobacco; nuclear and conventional weapons.
Further, Praxis prohibits investments in companies that fail to effectively manage and address their environmental risks and are not making sufficient progress in transitioning to the low-carbon economy, as well as companies that have poor human rights practices or weak standards on employee health and safety, among other things.
As of April 8, PRXG’s largest individual holdings were Apple Inc. (11.1% weighting); Microsoft Corp (10.7%); NVIDIA Corp. (9.4%); Amazon.com Inc. (6.4%) and Meta Platforms Inc. (4.3%). Meanwhile, PRXV’s largest individual holdings were J.P. Morgan Chase & Co. (3.5% weighting); Johnson & Johnson (2.4%); Procter & Gamble Co. (2.4%); Walmart (2.1%); and AbbVie (1.9%).
However, Regier indicated Praxis may invest in fossil fuel companies.
“We tend to avoid a zero-tolerance approach, particularly in industries central to our economy and society, such as fossil fuels, energy generation and technology,” he said. “In such areas, we seek to avoid those companies with the most risk and least long-term opportunity while engaging others on topics critical to a just, sustainable, and healthy planet where all can flourish.”
Moreover, if a company, say, does not allow their workers to form unions or if its board of directors lack diversity, Praxis will seek to engage with company management on “issues of mutual concern” rather than restrict them entirely.
Regier described faith-based investing as the “application of a set of values to the functions of financial decision-making, like the way people of faith choose to raise our children, help the poor, care for our planet, and engage with our neighbors.”
Conceding that ESG and diversity, equity, and inclusion frameworks in investing have faced political backlash in recent years, Regier points out that faith-based investing existed long before the emergence of that “troublesome acronym” ESG.
“Many other faith-based investment firms draw deeply from their own religious history and beliefs,” Regier noted. “So, when viewed from that perspective, current sociopolitical skirmishes over language and agenda can pale when held up to more timeless values of faith and Scripture. We will continue to live out these values, in the context of our fiduciary duties, to the best of our ability.”
Several other faith-based ETFs already exist. For example, Inspire Investing, which rates companies based on their alignment with biblical values, has nine ETFs with a total of $1.8 billion in assets.
“While Praxis is not the first faith-based firm to issue ETFs, we think our approach to investing will appeal to investors who want real world impact and who desire practical solutions to their investment objectives,” Regier added.
A recent survey released by Praxis found that there is a disconnect between investors and advisers regarding faith-based investing. The survey, “Faith-Based Investing: The Conversation Clients Seek, The Value Advisors Can Add,” found that only 59% of advisers are even aware of faith-based investments and 91% of advisers do not bother to raise the topic with a client, while 44% of investors said they incorporate their faith and values into their financial decisions.
“This disconnect suggests that advisers run the risk of underestimating or ignoring what’s important to clients,” said Chad Horning, president of Praxis Funds, in a statement. “But the research also explains why: advisers are uncomfortable with the topic, have relatively low levels of awareness of solutions available, and lack confidence in the efficacy of those solutions. In short, they’re reluctant to engage clients on a topic they fear will not produce good results.”
