Daily ETF Watch: A Carbon Fund Price War

December 05, 2014

(Editor's note: A previous version of this story errouneously said that 'LOWC," a fund from SSgA, had an annual expense ratio of 30 basis points. After a fee waiver of 10 basis points, the fund's expense ratio is actually 20 basis points. A corrected version follows. We regret the error.)

 

iShares, the world’s largest ETF company, filed regulatory paperwork this week suggesting the carbon-targeting fund it put into registration last month is about to launch—and with a lower price than a competing carbon ETF from Boston-based State Street, meaning a price war may be about to begin.

In its updated prospectus, San Francisco-based iShares said it’s pricing its iShares MSCI ACWI Low Carbon Target ETF with a net annual expense ratio of 20 basis points, or $20 for each $10,000 invested. That’s the same net expense ratio attached to the SPDR MSCI ACWI Low Carbon Target ETF (LOWC) that launched Nov. 26. Both firms instituted fee waivers to drop their expense ratios.

Both funds reflect business-development sensibilities among fund sponsors that are built on research suggesting climate change is linked to carbon emissions. Such gases contribute to the so-called greenhouse effect and rising temperatures.

While a tough row to hoe, scientists argue that the only way to slow the temperature rise is to cut carbon emissions. That's the idea behind the index and the funds: Companies with relatively low carbon profiles are likely to be rewarded over time in the form of rising valuations.

Both ETFs have their primary listings on NYSE Arca, and the upcoming iShares fund will trade with the ticker CRBN, according to the prospectus. They are both built around the same index, the MSCI ACWI Low Carbon Target Index.

State Street’s LOWC has net assets of about $22 million, according to information posted on the company’s website.

Under The Hood Of A Novel Index

That index is designed to overweight companies that have low carbon emissions and is derived from the MSCI All Country World Index, which covers emerging and developed markets, according to the prospectuses of both funds.

Weightings are determined by each company’s “carbon exposure,” which is based on greenhouse gas emissions and potential fossil-fuel-generated greenhouse gas emissions.

The index is designed to maintain a tracking error that is within 30 basis points of the performance of the MSCI ACWI, and limits the weight of a company to no more than 20 times its weight in the MSCI ACWI.

Country and sector weights must be within 2 percent of their weights in the MSCI ACWI, but the energy sector is not subject to any limits, according to the prospectuses.

Again, the SSgA fund is the first-to-market in terms of carbon emissions weighting. Although there are a number of funds investing in companies involved in clean energy activities, there is not yet a fund that weights companies from every industry by their environmental effect.

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