IEFA vs. NZAC: How Does A Foreign Fund Matchup Against A Sustainable ETF?

Key Points

The State Street SPDR MSCI ACWI Climate Paris Aligned ETF (NASDAQ:NZAC) and iShares Core MSCI EAFE ETF (NYSEMKT:IEFA) are popular options for investors seeking diversified international exposure, but their approaches and underlying holdings differ materially. This comparison explores whether the broad, climate-focused NZAC or the developed-market, cost-efficient IEFA makes more sense for a given portfolio.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year weekly returns. The 1-yr return represents total return over the trailing 12 months.

IEFA looks more affordable, charging 0.07% annually versus NZAC’s 0.12%, and delivers a higher dividend yield at 3.4% compared to NZAC’s 1.9%, a notable gap for income-focused investors.

Performance & risk comparison

What’s inside

IEFA tracks developed markets outside the U.S. and Canada, offering access to 2,589 holdings, with financial services (22%), industrials (20%), and healthcare (11%) as the top sectors. Its largest positions include ASML Holding N.V. (AMS:ASML.AS), Roche Holding AG (SIX:ROG.SW), and HSBC Holdings Plc (LSE:HSBA.L). With a 13-year track record, its international focus tends to lean towards companies in Europe and Asia.

NZAC targets companies that meet climate-aligned criteria, providing investors with exposure to efforts to reduce climate risks. It holds 729 stocks, with technology accounting for 32% of assets, followed by financial services at 16%, and industrials at 10%. Key holdings such as Nvidia(NASDAQ:NVDA), Apple (NASDAQ:AAPL), and Microsoft (NASDAQ:MSFT) highlight its U.S. tech tilt. The fund has been in operation for over 11 years and incorporates an ESG screen as a key feature, which helps evaluate which companies align with relevant sustainability themes.

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What this means for investors

If choosing between these two funds, it’s going to essentially come down to whether investors prefer a more American-focused ETF or more international exposure, and/or prefer a more sustainability-focused approach. IEFA currently substantially outperforms NZAC in terms of yield and one-year return, but over five years, NZAC’s return is approximately 10 percent higher, indicating stronger long-term performance.

And while NZAC does have American companies at the top of its holdings, it also holds international companies, including Taiwan Semiconductor Manufacturing Company Limited (TPE:2330) in the top ten. So investors who prefer NZAC over IEFA would still get international exposure. Just be mindful that when investing in ETFs with foreign companies in the top holdings, especially in IEFA’s case, they can move differently from common ETFs with predominantly U.S. stock holdings.

Volatility can be substantially higher in foreign markets, and price swings there can significantly affect foreign ETFs. Investors may want to look into relevant international economic news for the countries where IEFA’s top holdings are to better understand what they’re actually investing in.

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Adé Hennis has positions in Apple and Nvidia. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.