Investing in a Cooler Future: Top ETFs for Climate-Conscious Investors
Experts warn that climate change will increasingly affect various aspects of life, from housing to public health. A study from the Energy Policy Institute at the University of Chicago projects that for every one degree Fahrenheit rise in temperature, the costs to the U.S. economy will increase by 0.7% of GDP.
For investors interested in companies addressing climate issues, environmental, social, and governance (ESG) criteria can help guide their choices. These criteria evaluate whether a company’s operations meet standards for environmental stewardship, community involvement, and good governance.
Metrics for ESG investing can differ widely among investors. Many environmentally focused investors may prioritize a company’s environmental performance over social or governance factors. For those wanting to streamline their investment choices, three ETFs stand out: the iShares Climate Conscious & Transition MSCI USA ETF (NASDAQ: USCL), the Xtrackers MSCI USA Climate Action Equity ETF (NYSEARCA: USCA), and the SPDR MSCI USA Climate Paris Aligned ETF (NASDAQ: NZUS). Remarkably, all three funds outperformed the S&P 500 in the year leading to January 2, 2025.
The USCL ETF is unique in its approach, focusing on large- and mid-cap U.S. companies poised to gain from the shift to a low-carbon economy. It assesses companies based on current emissions, emissions reduction goals, and green revenue. This fund targets businesses that may not strictly adhere to ESG guidelines but are well-positioned to excel in an increasingly carbon-conscious marketplace.
As of January 2, 2025, USCL reported a return of just over 27%, potentially boosted by investments in high-performing tech firms like NVIDIA Corp. (NASDAQ: NVDA) and Meta Platforms Inc. (NASDAQ: META). The ETF features a low expense ratio of 0.08% and has an asset base exceeding $2.2 billion.
Xtrackers MSCI USA Climate Action Equity ETF
The USCA ETF aligns with the MSCI USA Climate Action Index and includes companies that are leaders in their sectors regarding climate transition. Although the index description is broad, it maintains a solid blend of market capitalization, momentum, and value characteristics. As of November 29, 2024, leading sectors included information technology (26%), financials (14%), consumer discretionary (13%), and communication services (12%).
Additionally, the USCA screens for ESG compliance through MSCI’s Business Involvement metrics, ensuring adherence to responsible investing practices. At an expense ratio of 0.07%, the fund has delivered a 27.2% return over the past year and has gathered nearly $2.4 billion in assets by January 2, 2025.
SPDR MSCI USA Climate Paris-Aligned ETF
The NZUS ETF adopts a wide-ranging strategy aimed at sustainable investments as defined by the Taskforce on Climate-Related Financial Disclosures and the EU Paris-Aligned Benchmark. This benchmark helps companies align with the Paris Agreement, which aims to limit global temperature rises.
While NZUS leans toward major tech stocks, it focuses on larger companies more than the other funds mentioned. The fund achieved a one-year return of 24.3%, slightly surpassing the broader market. However, NZUS is smaller in scale, with under $3 million in assets as of January 2, 2025, resulting in lower trading volume that could pose liquidity challenges for investors.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
