Essays on faith-based investments: Performance, risk, and diversification across faith traditions

Abstract

This investigative work examines the financial performance and portfolio diversification of faith-based exchange-traded funds (ETFs) and mutual funds across multiple religious traditions: Christian (Catholic, Presbyterian, Mennonite, and Evangelical) and Islamic, using a multi-method quantitative framework. The ETF sample comprises 18 funds, 17 faith-based and one non-faith-based, observed from January 2017 through December 2024; the mutual fund sample comprises 38 funds with inception-to-date data spanning 2004 through 2024. The Fama-French Five-Factor Model (FF5) is used to estimate risk-adjusted abnormal returns (alpha) and to decompose systematic factor exposures across the market, size, value, profitability, and investment dimensions. The Modified Herfindahl Diversification Index, extended via Sharpe-style returns-based analysis across eleven Bloomberg MSCI industry categories, quantifies full-period and rolling portfolio diversification at the fund level. Two integrated findings emerge. First, faith-based screening is associated with systematic, if modest, underperformance. Across both samples, most funds produce negative FF5 alpha estimates. Only one mutual fund—Amana Growth (AMAGX)—achieves statistically significant positive alpha over the full period, while 19 of 38 mutual funds record measurably significant underperformance. Rolling alpha trajectories confirm that positive performance is episodic rather than structural, with no fund sustaining outperformance across complete market cycles. The primary mechanism is not catastrophic return destruction but the systematic reshaping of factor exposures and constrained opportunity sets resulting from religious exclusion criteria. A second finding, and perhaps the most counterintuitive, is that religious screening does not automatically produce concentrated portfolios. Most funds in both samples maintain Diversification Index values above 0.80, representing more than 85 percent of their theoretical diversification maximum, and this breadth is temporally stable across rolling estimation windows. Where concentration does appear, it derives from asset-class mandates (real estate, government bonds) rather than from the logic of theological exclusion. The primary portfolio effect of screening is not the loss of diversification but the systematic reshaping of factor tilts—most prominently a universal small-cap bias and selective reductions in profitability-factor exposure. Faith traditions leave recognizable and measurable doctrinal fingerprints in factor space: the Amana funds’ near-zero financial-sector exposure directly maps Islamic prohibitions on interest-bearing activity; evangelical Christian funds’ stronger small-cap tilts reflect the sector composition of their exclusion criteria; Catholic and Presbyterian fund families exhibit heterogeneous yet internally coherent style profiles. Drawing on a theological framework developed across biblical covenant economics (Exodus 16; Leviticus 25), Matthean Kingdom ethics (Matthew 5 and 25), and Islamic stewardship principles (Surah Ali ʿImrān 3:92), the dissertation argues that the negative alphas documented throughout this work are best understood not as evidence of managerial failure but as the measurable financial cost of doctrinal consistency—the price accepted by investors for whom the ‘how’ of investing is inseparable from its theological ‘why.’ Choosing a faith-based fund is not a moral overlay on an otherwise standard portfolio decision; it is a choice to accept a distinctive pattern of risks, exposures, and likely return outcomes shaped as much by the specific contours of a fund’s theological tradition as by the investment expertise of its managers. Keywords: faith-based investing, religious investing, opportunity cost, exchange-traded funds, mutual funds, Fama-French Five-Factor Model, alpha estimation, portfolio diversification, Modified Herfindahl Index, socially responsible investing, Islamic finance, Christian finance, stewardship theology, covenant economics