Historic $2B Xtrackers ETF Launch Signals Climate Focus Shift
USCA Emerges as Largest ETF Launch, Reflecting Growing Demand for Climate-Specific Investments
The Xtrackers MSCI USA Climate Action Equity ETF (USCA) has made history as the largest ETF launch of all time in the U.S., amassing approximately $2 billion in assets on its first trading day. This ETF, which focuses on companies that support and participate in the climate transition, received the majority of its initial investment from Finland's largest pension fund, Ilmarinen. The launch of USCA reflects a growing emphasis on the environmental aspect of ESG, with climate change-related financial risks becoming increasingly difficult to ignore.
The MSCI USA Climate Action Index is the basis for USCA, selecting companies from the parent index, the MSCI USA Index, based on their emissions intensity, emissions reduction commitments, climate risk management, and greener business revenues. The index is designed to invest in companies that contribute to the climate transition and help drive change in the real economy.
Extreme weather events have prompted global concern, with the U.S. experiencing a three-way tie between 2011, 2017, and 2022 for the third-highest number of billion-dollar disasters, totaling $165 billion in 2022 alone. This has led to a shift in focus from broad ESG benchmarks to indices that specifically address climate change, such as the MSCI Climate Action Index.
The Xtrackers MSCI USA Climate Action Equity ETF (USCA) leapfrogged the Goldman Sachs MarketBeta US 1000 Equity ETF (GUSA) to take the top spot in the ETF industry with its $2 billion launch. However, the funds' investments show that the top 10 holdings of both vehicles include seven common companies, such as Microsoft Corp. and Alphabet Inc.
Ilmarinen's investment in USCA aligns with its strategy to achieve a carbon-neutral portfolio by the end of 2035. The pension fund's significant support for a climate-focused ETF is a notable endorsement for the product, considering the uncertain demand for such funds.
DWS Group, the firm behind USCA, offers a suite of 15 climate-related and ESG-focused ETFs, with assets under management totaling $4.5 billion. DWS aims to provide investors with bespoke index investment solutions and specialized products with attractive long-term return opportunities.
Despite the record-breaking launch, USCA's survival is not guaranteed, as it still needs to attract more investors to continue growing. The BlackRock U.S. Carbon Transition Readiness ETF (LCTU), which had the largest-ever ETF launch in 2021, has added less than $100 million of net new cash in the past year.
The launch of USCA highlights the efficiency of the ETF structure and the creation/redemption process, according to James Seyffart, an ETF analyst at Bloomberg Intelligence. The fund's ability to move $2 billion from one ETF to another without market impact demonstrates the nimbleness of the ETF market.
