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New U.S. Carbon ETF From BlackRock Makes Biggest-Ever Launch

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BlackRock, the world’s largest asset manager, launched two active sustainable ETFs — BlackRock U.S. Carbon Transition Readiness ETF (LCTU - Free Report) and the BlackRock World ex U.S. Carbon Transition Readiness ETF (LCTD - Free Report) — last Thursday, to tap the ESG investing boom.

Of the two, LCTU lured the maximum cash on record on its first day of trading, pulling in about $1.25 billion in capital. This marks the biggest launch in the ETF industry’s three-decade history, according to data compiled by Bloomberg. On the other hand, LCTD also attracted $475 million in its asset base and became one of the largest new ETFs ever launched (read: 3 New ETFs to Make Headlines Over the Long Term).

Both the ETFs are actively managed and seek to outperform their benchmarks over the long term by investing in companies that may be better positioned for transition to the low-carbon economy. To capitalize on the energy transition, BlackRock utilizes its Low-Carbon Economy Transition Readiness strategy wherein it overweights companies that it believes are best positioned to benefit from the transition to a low-carbon economy, and to underweight companies that are poorly positioned to benefit.

Then the issuer assigns a transition readiness score to each company by aggregating research-driven insights across five "pillars" (fossil fuels, clean technology, energy management, water management and waste management) and weighting the five pillar scores for each industry, according to their relative importance in it.

LCTU vs. LCTD

LCTU seeks to offer a broad exposure to large- and mid-capitalization U.S. companies while LCTD targets the large- and mid-capitalization world ex-U.S. companies. The U.S.-based ETF holds 350 stocks in its basket with each accounting for no more than 5.2% share and charges 30 bps in annual fees from investors. On the other hand, LCTD is home to 392 stocks with none making up for more than 3.2% of assets. It comes with 5 bps more fees per year relative to its domestic counterpart (read: 6 Successful New ETFs of First-Quarter 2021).

Behind the Success

The most successful debut in history came amid growing popularity for environmental, social and governance standards (ESG) investing. With continued technological advancement and digital revolution as well as growing awareness, ESG investing has emerged as the single-biggest global megatrend over the past half decade. It highlights the increasing relevance of sustainability criteria, often related to greenhouse gas emissions, gender equality and clean water in investment decisions of institutional and retail investors.

According to Morningstar, investors poured in a record amount of money into the funds aiming to help the environment and promote social good. Also known as sustainable funds, these amassed $51.1 billion of net new money from investors in 2020, the fifth consecutive annual record and more than double the prior year (read: Guide to Socially Responsible ETFs).

As such, it has proven to be a banner year for ESG ETFs around the world, according to data from TrackInsight. The global ETF analysis platform reported that global ESG ETF assets nearly tripled in 2020, achieving 223% growth year over year to reach a new AUM record of $189 billion. Over the course of last year, about $97 billion flowed into ESG ETFs around the world, with nearly 200 ESG ETFs brought to market.

The solid trend is likely to continue given the continued move toward lower carbon solutions as more companies and countries announce that they will aim for zero carbon targets. The ESG-focused theme is also likely to benefit from changes enacted by the new Biden administration. These changes include reversing course from the previous administration's pullback from ESG initiatives, rejoining the Paris climate accord, reversing rollbacks of environmental rules and emphasizing growth in clean energy. All these factors are driving the launch of ESG-focused ETFs this year.

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