2 New Global Warming ETFs Play It Cool

Two new carbon-targeting funds don’t tilt away from the market in a big way.

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Senior ETF Specialist
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Reviewed by: Paul Britt
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Edited by: Paul Britt

Two new carbon-targeting funds don’t tilt away from the market in a big way.

Two recently launched ETFs aim to help the global environment by allocating capital to firms with reduced emissions. Yet under the hood, the funds stand out mostly by how much they aim to blend in with the crowd. Still, I don’t see this as a bad thing, so long as investors understand what they’re buying.

Let me explain. The two funds are the SPDR MSCI ACWI Low Carbon Target ETF (LOWC) and the iShares MSCI ACWI Low Carbon Target ETF (CRBN). The two ETFs are hardly distinguishable from each other—more on that in a moment—and favor stocks issued by firms with lower carbon and greenhouse gas emissions (relative to the size of the company).

The funds speak to concerns about a warming planet and rising sea levels voiced not only by the usual suspects but also from the likes of Jeb Bush and Michael Bloomberg, former leaders of densely populated coastal areas.

Indeed, concerned institutions are already putting their money where their mouths are. The funds’ strong initial seed capital—$142 million and $22 million for CRBN and LOWC, respectively—came in part from the United Nations Joint Staff Pension Fund, the UN body said in a press release that was quickly picked up by Chris Dieterich of Barron’s.

How Green Is Your ETF?

Still, the funds aim to achieve global goodness while hewing tightly to a broad and marketlike benchmark, the MSCI ACWI—one that makes no effort to be green. That is, the funds operate within strict constraints that ensure their portfolios align with the market with respect to sector exposure and country exposure.

Sector bounds aren’t uncommon in the world of index investments. But the tight tolerance in this case—each sector represented in the carbon funds must have an allocation within 2 percentage points of the allocation each gets in the MSCI ACWI Index—is definitely stingy.

Moreover, the funds explicitly aim to deliver marketlike performance as reflected by the MSCI ACWI—which is not the funds’ actual underlying index—within a mere 30 basis points. That’s what I meant above by blending in with the crowd.

Heck, many ETFs don’t track their own indexes as tightly as 30 basis points, much less a reference index. The point here is that the two new funds set the bar high: They have environmental screens with teeth in them (as Barrons’ Dieterich outlined today), but they also avoid big risks away from the market. Again, the latter consideration is the “blending in with the crowd” aspect I noted above.

To illustrate the tight relationship between the green-leaning funds and the market, here’s a sector breakdown and top holdings of one of the ETFs, LOWC, compared with an ETF that tracks the marketlike MSCI ACWI index, the iShares MSCI ACWI ETF (ACWI | A-96).

SectorACWI (%)LOWC (%)
Financials21.423.6
Info Tech13.813.6
Health Care12.012.1
Consumer Discretionary12.011.3
Industrials10.712.1
Consumer Staples9.710.1
Energy7.95.9
Materials5.24.0
Telecom3.94.4
Utilities3.32.8

 

 

 

 

 

 

 

Bloomberg as of 12/9/2014; GICS sectors

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Top 10 Holdings
ACWI%LOWC%
Apple1.8Apple1.8
Exxon Mobil1.1Microsoft1.0
Microsoft1.0Johnson & Johnson0.9
Johnson & Johnson0.8General Electric0.8
Wells Fargo0.7Wells Fargo0.8
General Electric0.7Procter & Gamble0.7
Nestle0.7Nestle0.7
JP Morgan0.6JP Morgan0.7
Procter & Gamble0.6Novartis0.6
Roche0.6Pfizer0.6

Bloomberg as of 12/9/2014

The point is that the portfolio for LOWC (and likely for CRBN too) looks a lot like the marketlike ACWI, which makes sense if you’re trying to get similar performance. There’s a slight bias away from energy and toward financials, and XOM is notably absent from LOWC’s top 10, which indicates the fund’s emissions screens are at least having some impact.

Look Elsewhere For A Hot Sector Play

So why do I like these funds even as I paint them as wishy-washy rather than robust in their green-ness? It’s simple, really.

The constraints that make them marketlike serve to make them very useful for long-term allocations—precisely because they avoid making huge sector or country bets. In other words, the funds are much better suited for long-term core allocations than they are for a hot clean-energy sector play.

Pick ’Em

For investors who buy the premise, there’s little daylight between LOWC and CRBN.

They track the same index and were launched within weeks of each other. Both charge the same reasonable net fee of 20 basis points a year, or $20 for each $10,000 invested. Both were seeded with more money than is typical, as noted above.

Can you save the planet with an ETF? Maybe not, but it doesn’t hurt much to try with LOWC or CRBN. A caveat: Use care trading the new funds in early days. Their initial assets under management don’t reflect organic growth in trading volume.


At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Britt at [email protected] or follow him on Twitter @PaulBritt_ETF.

 

Paul Britt, CFA, is a senior analyst in the ETF Analytics group at FactSet, a team that maintains and develops an industry-leading suite of ETF-related data and analytics products. Prior to joining FactSet in April 2015, he was a senior analyst at etf.com, where he performed a similar role, and worked in private placement at Pensco Trust. Paul holds a B.S. from RIT and an M.S. in financial analysis from the University of San Francisco.