Retail investors are increasingly embracing climate-aligned strategies. Most of that enthusiasm is confined to stocks and equity-based funds and, to a lesser extent, bonds. However, carbon futures represent a potentially attractive avenue for market participants to profit from this type of reduction initiatives.
Thanks to exchange traded funds such as the KraneShares Global Carbon Strategy ETF (KRBN) and the KraneShares California Carbon Allowance ETF (KCCA), this type of futures investing has been democratized and made more accessible to a broader swath of investors.
KRBN is three and a half years old and follows the IHS Markit’s Global Carbon Index. Confirming interest in this type of futures investing, the KraneShares ETF has $482 million in assets under management. The California-focused KCCA, which turned two years old earlier this month, is home to $261 million in AUM. Institutional investors are clearly allocating to carbon investors, indicating there could be value in mimicking that playbook for retail market participants.
How Pros Use Carbon ETFs
KraneShares recently polled a variety of professional investors, including family office managers, pension managers and registered investment advisors, to examine how they use funds such as KCCA and KRBN within portfolios. The results are potentially notable to ordinary market participants considering these ETFs.
Not surprisingly, some pros embrace KCCA and KRBN as avenues for boosting returns, wagering that the price of carbon could surge in the years ahead.
“Today, the blended carbon price is $50 and is forecasted to rise to $120-160 over the coming years,” noted KraneShares. “This potential move forms the basis of many investors’ interest in global compliance carbon markets. The reason for these expanding forecasts is that carbon markets are structured to rise in price to act as a catalyst to decarbonize the global economy and enable governments to hit their emissions targets.”
Another benefit of ETFs such as KCCA and KRBN is, as noted above, is that these funds are futures-based products. That means they can act as diversification tools in portfolios that are overly allocated to bonds or equities.
A Perk of Futures-Based Funds
A perk of futures-based funds and one that should not be overlooked in the current macroeconomic environment is that futures can act as inflation hedges. That’s exactly what one large RIA firm told KraneShares was the motivation behind allocation to KCCA.
“One of the largest US RIAs invests in KCCA for inflation protection,” added the issuer. “At the firm, every investment on its platform has to fit three objectives: growth, capital preservation, or inflation protection. In their view, California carbon allowances naturally fit into the inflation hedge bucket because of its floor price mechanism. While inflation protection is the leading investment case, the firm also considers carbon a pure play climate investment. In their view, carbon presents a double win for its inflation protection and sustainable impact factor.”