Choosing Between Climate-Conscious and Broad Diversification ETFs: NZAC vs. URTH

In the evolving landscape of modern portfolio construction, investors face a critical choice: prioritizing climate-conscious investing or opting for traditional broad diversification. The SPDR MSCI ACWI Climate Paris Aligned ETF (NZAC) and the iShares MSCI World ETF (URTH) epitomize these two approaches. This analysis evaluates their risk-adjusted returns and ESG alignment, offering insights into how investors can align their portfolios with both financial and ethical objectives.

Performance and Risk Metrics: A Tale of Trade-Offs

Over the five-year period from 2020 to 2025, URTH outperformed NZAC in absolute returns, growing a $1,000 investment to $1,682 compared to NZAC's $1,522. However, risk-adjusted metrics tell a nuanced story. NZAC's Sharpe ratio of 1.23 suggests it delivered strong returns relative to its volatility, though URTH's 1-year Sharpe ratio of 1.34 and its lower annualized standard deviation of 15.33% indicate superior short-term efficiency. Conversely, NZAC's higher five-year drawdown (-29.6% vs. URTH's -26.9%) highlights its increased exposure to market fluctuations, partly attributed to its higher technology sector tilt (31% vs. URTH's 27%) and inclusion of emerging markets.

ESG Alignment: Climate-Conscious Screens vs. Traditional Diversification

NZAC distinguishes itself through its explicit alignment with the Paris Agreement, employing ESG screens to exclude high-carbon sectors such as thermal coal and oil and gas production. This climate-focused strategy also favors sustainability opportunities, resulting in a portfolio with 687–729 holdings, including tech giants like Apple and Microsoft. In contrast, URTH offers broad exposure to developed markets without ESG overlays, holding 1,320–1,343 stocks and emphasizing financial services and industrials. While NZAC's ESG criteria may limit its diversification, they appeal to investors prioritizing long-term climate resilience.

Cost Efficiency and Portfolio Implications

Cost considerations further differentiate the two. NZAC's 0.12% expense ratio is half that of URTH's 0.24% expense ratio, making it a more cost-efficient option for investors sensitive to fees. However, URTH's broader liquidity and longer track record may appeal to those seeking traditional global market exposure. The inclusion of emerging markets in NZAC's portfolio introduces additional growth potential but also geopolitical risks, whereas URTH's focus on developed markets offers more stability.

Strategic Considerations for Modern Portfolios

For investors prioritizing sustainability, NZAC's climate-aligned framework and lower fees position it as a compelling choice, particularly for those seeking to mitigate carbon risk. Conversely, URTH's higher returns, lower volatility, and broader diversification make it suitable for investors prioritizing traditional market exposure. The decision ultimately hinges on balancing financial performance with ethical alignment: NZAC sacrifices some returns for ESG integrity, while URTH sacrifices ESG criteria for broader market capture.

Conclusion

The NZAC vs. URTH debate underscores the growing tension between financial metrics and sustainability goals in portfolio construction. While URTH excels in risk-adjusted returns and diversification, NZAC offers a forward-looking approach to climate-conscious investing. Investors must weigh these factors against their risk tolerance, ethical priorities, and long-term objectives. In an era where ESG integration is no longer optional, the choice between these ETFs reflects a broader shift toward aligning capital with planetary imperatives.