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The sheer size of MSCI USA Climate Action Equity ETF at launch is likely to help it stand out, an analyst says.Brendan McDermid/Reuters

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DWS Xtrackers is staging the largest exchange-traded fund (ETF) launch of all time as its MSCI USA Climate Action Equity ETF USCA-A begins trading with US$2-billion of assets.

The listing on the New York Stock Exchange on Wednesday is backed by anchor investor Ilmarinen, a Finland-based insurer, which is providing the initial capital.

It will soar past the previous record for the largest global ETF launch, held by the Goldman Sachs MarketBeta US 1000 Equity ETF GUSA-A, which debuted with US$1.35-billion in April 2022 from its in-house advisory models.

This overtook BlackRock U.S. Carbon Transition Readiness ETF LCTU-A, which launched with US$1.2-billion from a consortium of investors including the California State Teachers’ Retirement System, Temasek Holdings Ltd. and FM Global in April 2021.

In terms of raising assets from the market, rather than via anchor investors, the most successful launch has been ProShares Bitcoin Strategy ETF BITO-A, which passed the US$1-billion mark on its second day of trading in October 2021, and saw US$1.6-billion of inflows in its first week, according to data from VettaFi LLC, a U.S. consultancy.

“This is a key milestone. In the U.S. there is a negative sentiment building toward environmentally friendly ETFs. A successful launch with the support of a large institutional investor to a targeted approach can be a factual counterpoint that might shift the narrative,” says Todd Rosenbluth, head of research at VettaFi.

MSCI USA Climate Action Equity ETF will hold large and mid-cap U.S.-listed companies that “are leading their sector peers in taking actions relating to climate transition.”

The passive fund, with an expense ratio of 0.07 per cent, will invest in the top 50 per cent of companies within each industry sector based on their emissions intensity, emissions reduction commitments, climate risk management and revenue from greener businesses. The underlying MSCI index was created at the behest of Ilmarinen and DWS Group.

“U.S. investors considering how to lower their carbon emissions over the long term are looking for best-in-class, forward-looking strategies that align with their objectives,” says Arne Noack, head of systematic investment solutions, Americas at DWS.

The money is not new to the ETF market, however. Ilmarinen is switching it from the US$3.2-billion Xtrackers MSCI USA ESG Leaders Equity ETF USSG-A. This is a broader best-in-class, sector-neutral fund that targets environmental, social and governance (ESG) in the round, rather than purely climate factors.

“We published in 2020 our portfolio Net Zero 2035 target. Because of this ambitious target, we have established asset class-specific road maps. This is part of that,” says Karoliina Lindroos, head of responsible investment at Ilmarinen.

“It’s a little bit similar to a carbon transition or Paris-aligned benchmark, but with sector neutrality. We understand that all the sectors are needed in the economy and we understand there has to be a transition in all sectors.”

Juha Venäläinen, senior portfolio manager at Ilmarinen, which has €56-billion of assets under management (AUM), says while it’s impossible to know how stocks will perform in advance, “the climate fight is getting fiercer and fiercer. Companies that are worse than their peers [in climate terms] will face the cost headwinds from not being able to be as good as their peers.”

Mr. Rosenbluth says the move was part of a wider trend of “asset managers moving away from broad ESG strategies and offering more products focused on climate change and environmental factors ... the factors that investors might care more about.”

The sheer size of MSCI USA Climate Action Equity ETF at launch is likely to help it stand out, Mr. Rosenbluth adds, as “it will come on the radar for other investors,” particularly institutions that will only invest in funds that have passed a minimum size threshold.

“There are new ETFs coming to market on a weekly basis and it’s hard to stand out, so for investors who are looking through the new inventory of ETFs a product that has very quickly crossed a key asset milestone, it will put the fund on investors’ radar,” he adds.

“It doesn’t mean that they will buy it, but it gets through the filters.”

Frankfurt-based DWS currently has 14 U.S.-listed climate-related and ESG ETFs with combined assets of US$4.5-billion, just under a quarter of Xtrackers’ overall U.S. AUM of US$19.1-billion. Globally, Xtrackers manages US$144-billion and DWS €821-billion.

Dirk Goergen, chief executive officer of DWS Americas, says the launch demonstrated its ability to “partner with top institutional investors to create bespoke client-led solutions.”

Launching with a large volume of assets is no guarantee of success, however.

Goldman Sachs MarketBeta US 1000 Equity ETF’s assets have dipped to US$1.25-billion since launch, although market falls will have played a factor in that. BlackRock U.S. Carbon Transition Readiness ETF is today a little larger than at its launch, at US$1.38-billion.

“BlackRock U.S. Carbon Transition Readiness ETF came to market largely funded. I don’t think it’s really seen inflows at all. In nearly two years since the product launched it has gathered US$178-million,” Mr. Rosenbluth says, citing VettaFi figures.

“It’s got anchor institutional investors that have stayed loyal but the fund hasn’t received broader investor adoption,” he says.

BlackRock’s sister World ex U.S. Carbon Transition Readiness ETF LCTD-A debuted with a further US$500-million on the same day, but today boasts assets of just US$468-million.

Meanwhile, ProShares Bitcoin Strategy ETF is back down to US$943-million, not helped by mark-to-market losses of 56 per cent since inception.

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