Sustainable and Successful: 3 Climate ETFs Beating the Market

Key Points

• Climate change is a growing concern for many investors, with rising temperatures expected to have a significant economic impact.
• Several ETFs provide easy exposure for investors looking to target a basket of climate-conscious companies—or those prepared for an increasingly climate-focused economy.
• USCL, USCA, and NZUS all focus on climate change and have a history of beating the broader market throughout 2024.

Experts predict that the impact of climate change on everything from housing to public health will increase over time. A study by the Energy Policy Institute of the University of Chicago estimates that for every one degree Fahrenheit increase in average temperature, costs to the U.S. economy will increase by 0.7% of GDP.

Investors looking to support companies working to mitigate the effects of climate change might turn to the principles of environmental, social, and governance (ESG) investing. These investors employ a set of criteria to determine whether a company's operations and goals meet a threshold for environmental responsibility, corporate citizenship, and sound governance.

It's no surprise that metrics for ESG investing vary considerably depending on the investor. Indeed, some environment-conscious investors may not be especially interested in how well a potential target company performs on the social and governance components of a screen. For investors looking to simplify the process and target companies with a strong track record of positive environmental impact, three ETFs provide broad exposure: 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. As a bonus, all three have outperformed the S&P 500 in the year leading to January 2, 2025.

iShares Climate Conscious & Transition MSCI USA ETF

USCL is not a traditional ESG-focused ETF; rather, it seeks to invest in large- and mid-cap U.S. companies that are likely to benefit relative to their sector peers from a transition to a low-carbon economy. The fund searches for companies based on current emissions levels, emissions reduction targets, green business revenue, and similar measures. Thus, the companies may not specifically focus on ESG goals but rather are advantageously positioned to benefit from either a regulatory environment that discourages carbon emissions or a broader secular shift in that direction.

In the year leading to January 2, 2025, USCL returned just over 27%. This outperformance of the broader market may be due at least in part to its focus on red-hot tech firms like NVIDIA Corp. NASDAQ: NVDA and Meta Platforms Inc. NASDAQ: META. The fund also offers investors a very modest expense ratio of just 0.08% and a solid asset base of over $2.2 billion as of the date above.

Xtrackers MSCI USA Climate Action Equity ETF

USCA targets the MSCI USA Climate Action Index, a broad collection of companies leading in their respective sectors "in terms of their positioning and actions relative to a climate transition." While this language is somewhat vague, the index nonetheless strikes a strong balance between market capitalizations, momentum and value traits, and sectors. As of November 29, 2024, the index consisted of a combination of information technology (26%), financials (14%), consumer discretionary (13%), communication services (12%), and other sectors.

The index underlying USCA also screens for companies based on MSCI's ESG Business Involvement metrics, ensuring that companies adhere to ESG principles. Considering the complexity of the portfolio construction, USCA is a bargain for investors with an expense ratio of 0.07%. The fund has returned 27.2% in the last year and has an asset base of just under $2.4 billion as of January 2, 2025.

SPDR MSCI USA Climate Paris-Aligned ETF

NZUS provides investors with a broad approach to investing based on climate ideals. It seeks to both increase exposure to sustainable investments as defined by the Taskforce on Climate-Related Financial Disclosures and the EU Paris-Aligned Benchmark—a set of company guidelines for governance, strategy, risk management, and other concerns related to climate—and to limit exposure to transition risks associated with climate change. A Paris-Aligned Benchmark aligns with the Paris Agreement, an international treaty aiming to limit global temperature increases.

Like USCL and USCA, NZUS tends to be weighted toward major tech players, but it has a significant tilt toward large-cap names, while the funds above are more evenly split between large- and mid-cap companies. NZUS has a one-year return of 24.3%, just beating out the broader market in the last year. In comparison with the other funds on this list, its asset base is much smaller—NZUS has under $3 million in AUM as of January 2, 2025, and a considerably lower trading volume than its rivals. These factors may negatively impact liquidity and ease of trading for climate-focused investors.