Wall Street Risks Push Investors Toward Faith-Based Funds

June 25, 2010 — -- Faith-based investment funds struggled for years to gain attention as a viable alternative to traditional funds. Investors worried about losing financial returns and didn't always understand what faith had to do with money.

In the wake of the financial crisis, faith-based investing has found new fans. Experts say there has been a surge in demand for investment products that adhere to certain religious values and a growth in the options available to investors.

Putting Faith in Mutual Funds

"People are getting back to their roots," says Jay Peroni, a financial advisor and author of "The Faith-Based Millionaire," arguing that Americans who were burned by corruption during the financial crisis have lost some faith in traditional finance. "They're looking at what's important to them, and the most important thing to many of them is their values."

Faith-based investing has been around for years. The term describes the many ways that people can put their money to work without violating their religious beliefs, by avoiding companies involved in abortion, say, or gambling.

Faith-based investors typically have two mainstream choices: mutual funds and exchange traded funds. Mutual funds make up the biggest bucket, with more than $28 billion of assets under management. Only one company, FaithShares, currently offers ETFs.

David Kathman, a mutual fund analyst at Morningstar Research, says faith-based investors shouldn't worry about losing returns. While investing theory states that restricting one's portfolio leads underperformance because the investor is losing diversification, in practice, faith-based screenings don't make a financial difference either way.

"In practice, other factors have a lot more to do with returns, such as the cost of the fund or the manager's skill," he says.

Faith-based screenings, however, do make a big difference to investors who want to invest in a way that agrees with their religious beliefs.

Luckily for religious investors, there are investment options for a wide variety of religious beliefs. With help from Morningstar Research data, we have compiled five popular options.

Assets Under Management: $2.7 billion

Five-Year Average Annualized Return: 6.76 percent

Top Holdings: Apple, PepsiCo, Johnson & Johnson

Profile: Invests according to Islamic principles, which means its funds avoid earning interest -- or investing in companies that do, such as banks -- as well as companies involved in liquor, pornography and gambling.