DWS’ $2B ETF Launch Is History Repeating Itself
With yesterday’s launch of the Xtrackers MSCI USA Climate Action Equity ETF (USCA), history seems to be repeating itself, although with a twist.
The new exchange-traded fund, which focuses on companies that are addressing and adapting to climate change, pulled in more than $2 billion in assets in its first day of trading, with the bulk of that money coming from Finnish pension fund Ilmarinen. That is the biggest ETF launch ever. But this is a familiar story.
In March 2019, DWS rolled out an ETF that targeted the U.S. stocks with the highest ESG scores. The Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG) quickly gathered $843 million within 24 hours of its launch, mainly from Ilmarinen, which had backed the fund’s launch and that of another very similar fund a few months later.
The iShares ESG MSCI USA Leaders ETF (SUSL) tracks an “extended” version of the index underlying USSG, which, practically speaking, amounts to two more holdings than are included in USSG’s portfolio. SUSL pulled in roughly the same amount within 24 hours of its launch as well.
At the time of its launch, USSG was the biggest ETF rollout to hit the market in 15 years. Yesterday, it saw more than $2 billion in outflows, roughly the same as USCA’s inflows.
USCA tracks the MSCI USA Climate Action Index, which focuses on companies that are leading their sector peers in the broad MSCI USA Index in terms of taking action to support or participate in the climate transition.
Individual companies are evaluated based on their emission intensity, green business revenue, climate risk management score as determined by MSCI and emission track record. Companies with the highest scores are selected for inclusion in the index until the count reaches at least 50% of the number of securities in each sector in the parent index.
The index also implements traditional ESG screens around business controversies and industry exclusions, according to the prospectus.
iShares Plans Similar Fund
Just as in 2019, BlackRock’s iShares arm has filed for a similar fund to USCA. The iShares Climate Conscious & Transition MSCI USA ETF will track the MSCI USA Extended Climate Action Index.
USCA and the planned iShares fund reflect a growing focus on the environmental aspect of ESG, even as the concept of ESG has seen significant political backlash in the U.S. during the past year. According to MSCI, the indexes in its Climate Action series are designed to “invest for the transition and finance companies’ emissions reduction to drive change in the real economy.”
The increase in extreme weather events at the global level has been widely reported upon, with those disasters in the U.S. in 2022 sporting a $165 billion price tag, putting that year in a three-way tie with 2017 and 2011 for the third highest number of billion-dollar disasters, according to climate.gov. Many would argue that the financial risks associated with climate change are simply too big to ignore.
“The main motivation behind the shift is a refinement and moving away from a broad ESG benchmark that incorporates several environmental, social and governance related aspects to focus specifically on climate. The MSCI Climate Action Index has consciously been chosen by them, because it has a broad set of representation,” said Arne Noack, head of systematic investment solutions, Americas at DWS Group, in reference to the new launch.
“It is really focused on a broad representation of all sectors that are relevant in the economy, but focusing only on the leaders within each sector that are [the] best for overall climate transition,” he added, noting that his firm believes there is room in the ETF marketplace for both the broad USSG and the climate-focused USCA.
Although Ilmarinen is the largest shareholder in both USSG and SUSL, both funds are successful in their own right, and are owned by a broad selection of institutional investors. Even after the $2 billion in outflows yesterday, USSG still has well over $1 billion in assets under management, while SUSL currently has roughly $3.2 billion in assets under management.
It makes sense that neither firm seems to have opted to simply change the indexes on USSG or SUSL and instead are launching entirely new products, ensuring that both funds retain the additional investors that they have attracted organically since their launches.
USCA has an expense ratio of 0.07% and lists on the NYSE Arca.
Contact Heather Bell at heather.bell@etf.com
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