This week, the iShares Climate Conscious & Transition MSCI USA ETF (USCL), a newly launched ESG ETF, saw strong net inflows from Ilmarinen, a Finnish insurance company. At the same time, an older ESG ETF, the iShares ESG MSCI USA Leaders ETF (SUSL), incurred a sizable redemption.
I have confidence that some will wrongfully view the latest redemption as a sign that there is diminished demand for ESG ETF strategies. Even the more jaded will point to the political backlash against BlackRock’s iShares business as the reason for the net outflows. However, the reality is different, and there is a clear pattern to support this.
Ilmarinen Made a Similar ESG ETF Move in April
The Xtrackers MSCI USA Climate Action Equity ETF (USCA) is another relatively new ESG ETF. USCA launched in April 2023 with approximately $2 billion flowing in the first day, per VettaFi’s LOGICLY data. According to its asset manager, DWS, the investment into USCA was also made by Ilmarinen. The inflow was part of Ilmarinen’s goal to achieve a carbon-neutral portfolio by the end of 2035. As of early June, USCA had $2.1 billion in assets.
Ilmarinen funded the USCA investment by redeeming a similar amount of money from the Xtrackers MSCI USA ESG Leaders Equity ETF (USSG). As of early June, the ESG ETF still had $1.3 billion in assets.
The Newer ESG ETFs Are Focused on a Low-Carbon Economy
Like USCL, USCA focuses on companies in each sector that stand out from an environmental perspective — the “E” pillar of ESG. For both ETFs, the top holdings include Apple, Microsoft, and NVIDIA. USCL, which has a modest 0.08% expense ratio, invests in large- and mid-cap companies well-positioned to transition to a low-carbon economy based on emissions intensity and climate risk mitigation.
Meanwhile, SUSL and USSG are index-based strategies that focus on companies that are relatively strong across the social and governance pillars, not just environmental ones. All four ESG ETFs take a sector-neutral approach to investing.
We think there is a reason to celebrate. A large institutional investor, Ilmarinen, remains committed to the ETF structure. Rather than simply redeeming shares of SUSL and putting the money into a separate account, the investor worked with iShares to ensure that it could have a targeted, climate-focused approach. Then, it successfully traded close to $2 billion from one ETF to another without impacting the broader market, proving that there is strong liquidity. With a sizable asset base, we think more investors will look more closely at USCL than other new ESG ETFs. SUSL still has over $1 billion following this week’s redemption.
Large Institutions Often Tap Into iShares ETFs’ Liquidity
iShares is also no stranger to seeing large institutions trade in and out of its ETFs due to the strong liquidity available. In March 2023, the iShares ESG Aware MSCI USA ETF (ESGU), its largest ESG fund, had a $4 billion net outflow in one day.
As we noted at the time, the iShares MSCI USA Quality Factor ETF (QUAL) pulled in $4.8 billion the same day. We believed that the swap represented a tilt by a model manager toward equity risk reduction favoring large- and mid-cap stocks amid a shifting macroeconomy and the impact of the bank failures on monetary policy.
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