NZAC vs. ACWX: A Portfolio Allocation Decision on Climate Screening and U.S. Exposure

The choice between the SPDR MSCI ACWI Climate Paris Aligned ETF (NZAC) and the iShares MSCI ACWI ex US ETF (ACWX) is a classic trade-off between strategic intent and structural efficiency. At its heart, this is a decision between a climate-aligned global fund and a pure international ex-U.S. vehicle, each with distinct cost, scale, and mandate profiles.

The scale difference is stark. ACWX commands a dominant position with $8.4 billion in assets under management, a figure that dwarfs NZAC's $182 million. This gap translates directly into liquidity and operational efficiency. ACWX's deep liquidity supports its role as a core building block for institutional international allocations, while NZAC's smaller size introduces potential challenges for large-scale trading and can limit its appeal as a primary vehicle for broad exposure.

Cost is a clear advantage for NZAC. The climate-focused fund carries a 0.12% expense ratio, more than half the 0.32% fee of ACWX. For a portfolio manager, this 20 basis point differential represents a tangible drag on net returns over time, especially in a low-yield environment where every percentage point counts.

The strategic divergence is fundamental. NZAC is built around a climate screen aligned with the Paris Agreement, using the TCFD framework to exclude fossil fuels and controversial weapons while maintaining a global mandate that includes U.S. stocks. ACWX, by contrast, has a pure geographic mandate: it excludes all U.S. companies and has no ESG overlay. Its sector weights are broad, with significant exposure to financials and industrials, and it offers a higher dividend yield of 2.7% compared to NZAC's 1.9%.

The bottom line for institutional capital allocation is this: ACWX offers superior liquidity and a higher yield for a dedicated international tilt, making it a structurally efficient choice for that specific exposure. NZAC provides a low-cost, climate-aligned path to global equity participation, but its small scale and higher cost relative to pure global funds like ACWI (which includes U.S. stocks) limit its role as a primary global equity vehicle. For a portfolio seeking pure international diversification, ACWX remains the more efficient and liquid option.

Sector, Performance, and Risk-Adjusted Return Analysis

The performance and risk profiles of NZAC and ACWX present a clear divergence in investment outcomes, directly impacting their suitability for different portfolio objectives. As of early January 2026, the gap is stark: ACWX delivered a 1-year total return of 34.2%, outpacing NZAC's 22.0%. This differential is not a minor fluctuation but a structural reflection of market leadership. ACWX's 29.7% price gain in 2025 highlights the strong momentum in international equities relative to U.S. volatility, a trend driven by factors like cheaper valuations abroad and a more diversified market structure.

Income generation is another key differentiator. ACWX offers a 2.7% dividend yield, a significant premium over NZAC's 1.9%. For a portfolio seeking current income from international exposure, this yield advantage is material. It partially offsets ACWX's higher expense ratio and underscores its appeal as a cash-generating asset in a global portfolio.

The sector bias between the two funds reveals their underlying economic exposures. NZAC exhibits a pronounced technology tilt of 35%, reflecting its inclusion of major U.S. tech giants like Nvidia and Apple. In contrast, ACWX's largest sector weight is financial services at 25%, with significant exposure to industrials and technology as well. This divergence means NZAC is more sensitive to the fortunes of global tech, while ACWX provides a broader, more traditional international financial services and industrial footprint.

Risk profiles, however, show remarkable similarity. Both funds have nearly identical market betas, with NZAC at 1.06 and ACWX at 1.02. This indicates they carry comparable sensitivity to broad equity market movements. Their maximum drawdowns over five years are also close, with ACWX at -30.06% versus NZAC's -28.29%. The bottom line for risk-adjusted returns is that the superior performance of ACWX is not due to a lower beta or reduced volatility, but rather a function of its pure international mandate capturing a strong market cycle.

For institutional allocation, this analysis is decisive. The combination of higher yield, superior total return, and a broader, more traditional international sector exposure makes ACWX the more efficient vehicle for a dedicated non-U.S. allocation. NZAC's lower cost and tech tilt are compelling for a climate-aligned global strategy, but its underperformance and smaller scale limit its role as a primary international equity holding.

Catalysts, Risks, and Portfolio Construction Implications

The institutional case for each fund hinges on distinct catalysts and risks that will shape their future trajectories and portfolio roles. For NZAC, the primary risk is its structural vulnerability. With assets of just $182 million, the fund operates at a scale that can limit liquidity and increase tracking error, particularly during periods of market stress. This low AUM may also hinder its ability to attract the large, passive flows that institutional allocators often deploy. In contrast, ACWX faces a different set of headwinds. Its pure international mandate makes it a direct beneficiary of U.S. market volatility. Should global trade tensions escalate or U.S. equity valuations face renewed pressure, ACWX's appeal could surge, but its performance would remain tethered to the fortunes of non-U.S. markets, which are not immune to geopolitical shocks.

A key catalyst for NZAC's thesis is the institutional adoption of climate-aligned benchmarks. As pension funds and sovereign wealth managers formalize net-zero commitments, the demand for vehicles that explicitly align with the Paris Agreement and incorporate frameworks like the Taskforce on Climate Related Financial Disclosures (TCFD) is expected to grow. This could drive meaningful AUM expansion for NZAC, improving its liquidity and execution efficiency. The fund's low 0.12% expense ratio positions it well to capture this flow, turning its current scale disadvantage into a potential growth story.

From a portfolio construction standpoint, the implications are clear. ACWX is a conviction buy for a dedicated international diversification mandate. Its deep liquidity, higher yield, and proven track record of capturing international market momentum make it a structurally efficient core holding. It provides a pure, low-cost way to tilt away from U.S. concentration. NZAC, by contrast, is a tactical, low-cost overlay. It is best deployed by investors who already hold a global equity position (like ACWI) but wish to systematically reduce climate risk and increase exposure to sustainable opportunities within that global footprint. Its role is not to replace a core international fund but to refine it.

The bottom line is one of strategic fit. ACWX offers a high-conviction, liquid path to pure international diversification. NZAC offers a low-cost, climate-aligned path to global equity participation. For institutional capital, the choice is not about which fund is "better," but which one best serves the portfolio's specific objectives: pure geographic tilt versus climate risk mitigation.