The second exchange-traded product providing access to global carbon emissions markets is set to launch Monday in the U.S., bringing an alternative to a much-discussed new asset class that's also spreading through Europe.
The AirShares EU Carbon Allowances Fund (NYSE Arca: ASO) is actually a commodity pool that tracks a basket of exchange-traded futures contracts for European Union Allowances (EUAs). Each contract provides for delivery of 1,000 EUAs at a specified price.
The new ETF-like product, as AirShares refers to ASO, invests in futures contracts that expire each December beginning in 2009 and extending through 2012. As contracts approach their December expiration, the fund sells expiring contracts and replaces them with contracts of later expirations, according to XShares Advisors, which is sponsoring the new exchange-traded products.
ASO will start with nearly $5 million in seed money as an asset base. It's expected to come with an expense ratio of 0.85% annually. The fund opens with some 238 different contracts. More detailed information can be found on the new AirShares site here.
Since the commodities involved aren't physically deliverable, ASO can't be considered an ETF. But it acts like many exchange-traded commodities products that are popular in Europe. It's also important to note ASO represents a pool of futures contracts rather than notes.
That's significant since another type of fund, referred to as an exchange-traded note, is already on the market. In late June, Barclays Capital gained first-mover status into the U.S. exchange-traded products market for carbon emissions with its iPath Global Carbon ETN (NYSE Arca: GRN).
Just like ASO, it trades throughout the day along an exchange. But GRN is priced a bit cheaper at 0.75%. As an ETN, however, GRN carries counterparty risk since it actually represents an investment in unsecured debt notes issued by Barclays Bank Plc.
With credit markets in turmoil, investors have been shying away from ETNs of all types from even the biggest global financial institutions. As such, ASO presents U.S. investors with their first exposure to carbon emission markets without undertaking counterparty credit risks.
It's worth noting that Barclays' unsecured long-term debt is rated AA by Standard & Poor's. It also has a similar rating from Moody's, another of the major credit rating agencies. GRN also tracks an index created by Barclays, while ASO—which is also passively managed—does not, since it buys futures contracts in an automatic, rules-based manner.
The ASO portfolio will be rebalanced annually. As contracts near expiration, the fund will sell its expiring contracts and replace them with contracts of later expiration dates. The remaining contracts will be reweighted based on volume. AirShares will buy and sell contracts using U.S. dollars, even though the futures ASO holds will be denominated in euros.
GRN now will become the smaller of the two U.S.-listed exchange-traded products covering carbon emissions markets. It's listed by Barclays with a total market cap size of slightly more than $4.3 million heading into Monday.
The Big Deal
So what's the big deal about carbon emissions? With global warming gaining increasing attention and being addressed with new urgency, index providers and European ETC sponsors have been busy in the past two years trying to capture the market for trading carbon in world markets.
Such so-called carbon emission credits are traded by companies who get tax breaks and other incentives for lowering pollutants into the air. These standards are designed to set limits on the amount of a pollutant that can be released into the atmosphere and allocate credits among companies creating emissions. Those that do not use all their emissions credits can sell them to companies that need them.
By some estimates, the global carbon market is worth more than $50 billion a year.
This year, the index for GRN was down more than 25% through November. But it had a low correlation to both the S&P 500 as well as the broad-based Dow Jones-AIG Commodity Index.
In late October, ETF Securities listed Europe's first carbon ETF on the London Stock Exchange. (See related story here.)
Of course, while ASO doesn't hold the same sort of counterparty risks as GRN, investors should be aware that its sponsor and investment advisor has been closing funds lately. (Brown Brothers Harriman is listed as ASO's administrator and custodian.)
In August, XShares closed 15 of its HealthShares ETFs. (See related story here.) Last month, it threw in the towel for its remaining funds in that product line. (See related story here.) And earlier in the year, XShares closed its AdelanteShares of real estate ETFs.
Those moves, coming along with several management shake-ups and layoffs, left it with a line of target-date retirement ETFs. But the company has maintained that shuttering of funds, along with a new round of capital-raising activity, would give it more opportunity to focus on other funds in its pipeline.
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