Global X ETFs has launched a new fund in the US providing exposure to liquid cap-and-trade carbon credits issued around the world.
Pedro Palandrani, Director of Research at Global X ETFs.
The Global X Carbon Credits Strategy ETF (NTRL US) has been listed on NYSE Arca with an expense ratio of 0.39%.
In a typical cap-and-trade regime, a limit (or cap) is set by a regulator, such as a government entity or supranational organization, on the total amount of specific greenhouse gases, such as CO2, that can be emitted by regulated entities, such as manufacturers or energy producers.
The regulator may then issue or sell individual emission allowances to regulated entities. Polluters that want to increase their emissions must buy allowances from others willing to sell them, thereby representing a market-based approach to controlling pollution.
By incrementally scaling back the number of allowances over time, cap-and-trade regimes represent a powerful policy tool for achieving ambitious climate targets such as those set out by the Paris Agreement.
For investors, as well as delivering exposure to the energy transition economy, carbon credits have historically exhibited a low correlation to traditional asset classes such as equities and fixed income, offering the potential to enhance portfolio diversification.
Pedro Palandrani, Director of Research at Global X ETFs, said: “The pressure to meet Paris Agreement-aligned emissions reduction commitments is intensifying, and regulators worldwide are looking to tighten emissions caps, potentially increasing the scarcity and price of carbon allowances.
“With the launch of NTRL, Global X is leveraging its expertise in thematic investing to offer investors exposure to these potential price increases as well as possible portfolio diversification when combined with traditional asset classes.”
Investment approach
NTRL is linked to the ICE Global Carbon Futures Index which consists of futures contracts referenced to carbon credits issued across four geographies: Europe (through ICE EUA contracts), the United Kingdom (ICE UK Allowance contracts), California (ICE California Carbon Allowance contracts), and Northeast United States (ICE Regional Greenhouse Gas Initiative contracts).
The index weights its exposure to each of the four jurisdictions based on the total dollar volume of the contracts traded within that scheme over the six-month period before September each year. Any single jurisdiction will be subject to a maximum weight cap of 50% or a minimum floor of 5%.
The index follows a rolling rebalancing schedule made during the first fifteen business days of the months of September, October, and November, each year.
As of 25 May, the ETF had a 54% allocation to ICE EUA contracts, a 21% allocation to ICE California Carbon Allowance contracts, a 20% allocation to ICE UK Allowance contracts, and a 5% allocation to ICE Regional Greenhouse Gas Initiative contracts.
The fund joins an increasingly crowded field of ETFs providing either global or regional exposure to carbon credit markets. Amongst six rival funds collectively housing approximately $1 billion in assets under management, the largest is the $570 million KraneShares Global Carbon Strategy ETF (KRBN US) which has an expense ratio of 0.78%.