Faith Matters? A Closer Look at the Performance of Belief-Based Investments

This study examines the performance and risk of indexes for US and European stocks which account for non-financial “beliefs”, namely the ESG (Environmental, social and corporate governance) indexes, Islamic indexes, and Christian indexes. To explore if such beliefs matter for investment outcomes, we compare these indexes to their respective benchmarks and to indexes of different belief. Our results show that the majority of performance of all the belief-based indexes is driven by their benchmarks, while the choice of belief in these indexes only accounts for a small fraction of the indexes’ performance. Therefore, we conclude that belief-based indexes are attractive for investors who are merely looking to include their belief without expecting abnormal performance over the standard benchmarks in their investments. However, for investors who are seeking for more pronounced differences in risk-return characteristics from a belief-based investment, it may be be necessary to go beyond such belief-based indexes and look for alternative ways of integrating these beliefs in their investment process.