DSI: Nothing Compelling Here (NYSEARCA:DSI)

If you are an investor who firmly believes in making investment decisions that align with your ethical principles, then the iShares MSCI KLD 400 Social ETF (NYSEARCA:DSI) is an investment vehicle that deserves your attention. DSI is a passively managed exchange-traded fund that was launched on November 14, 2006. It seeks to track the investment results of the MSCI KLD 400 Social Index, an index composed of U.S. companies that have been identified by the index provider as having positive ESG characteristics. The DSI ETF has a total expense ratio of 0.25% and offers a 12-month trailing yield of 1.11%. It is designed primarily for investors who wish to incorporate ESG principles into their investment approach.

Detailed Breakdown of DSI’s Top 5 Holdings

Candidly, I’m not a fan of ETFs that end up looking like the usual suspects in terms of top holdings, and unfortunately, that’s the very problem with DSI. I understand the companies in the top 10 fit their criteria, but by the same token, it’s the same major companies that drive passive large-cap market averages that don’t have an ESG mandate. In other words, there really is no clear diversification benefit here whatsoever.

Again – I understand that the ETF will screen out non-ESG ranked companies based on the index methodology, but the fact that the stocks in the top 10 are all ones investors in equity ETFs likely already own, I’m not sure there’s a real reason to position into the fund at all.

Sector Composition and Weightings

DSI’s sector composition closely mirrors that of the S&P 500 Index. Its most dominant sector is Information Technology, with a weight of around 36%. The Financials sector follows with a weight of 12%, then comes the Health Care sector, which constitutes 10% of the fund. Again – same issue here from my vantage point. If the holding and sector allocations largely track what drives the S&P 500, then there really isn’t a compelling reason to switch out unless you suddenly find yourself wanting to have ESG as a core portion of your portfolio allocation.

Peer Comparison

Comparing the DSI ETF to other similar ESG ETFs, such as the SPDR S&P 500 ESG ETF (EFIV), iShares ESG Aware MSCI USA ETF (ESGU), and Nuveen ESG Mid-Cap Growth ETF (NUMG), we find that DSI’s performance ranks 2nd overall. While EFIV has outperformed it quite a bit more, this likely has more to do with ESG screening differences between the two funds, and how much Technology has driven each fund’s overall performance over the last three years.

Pros and Cons of Investing in DSI

Investing in the DSI ETF comes with its unique set of advantages and potential drawbacks. On the positive side, DSI provides exposure to companies with strong ESG practices, aligning investors’ portfolios with their ethical principles. The fund’s sector composition closely mirrors the broader market, reducing sector-specific risks. Moreover, DSI’s quality score and ESG coverage are superior to many of its peers, with the fund being in the 97th percentile on the MSCI ESG Quality Score metric.

On the downside, DSI’s holdings are heavily skewed towards the technology sector, which can lead to increased volatility. It also doesn’t really differentiate itself much in terms of both top sectors and top individual positions relative to pretty much every other US equity market-cap weighted fund out there.

Conclusion: Should You Invest in DSI?

Bottom line? The iShares MSCI KLD 400 Social ETF is trying to appeal to the ESG crowd. It’s succeeded in that it has over $4 billion in assets. However, the fund’s overall composition presents a practical challenge for me, as it fails to stand out. Its heavy exposure to the technology sector could be a concern for some investors. This is a pass for me. I think there are better and more interesting ways of playing ESG than this.

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