Please ensure Javascript is enabled for purposes of website accessibility

Sick of Stocks? Trade Carbon

By Zoe Van Schyndel, CFA – Updated Apr 5, 2017 at 7:51PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This ETF gives you access to carbon trading markets.

Many investors have just about had it with stocks. And with ETF innovation continuing at breakneck pace, you can invest in markets that have just about nothing to do with investments you're familiar with.

For example, the AirShares EU Carbon Allowances Fund (NYSE:ASO) gives investors a chance to access the carbon trading market in Europe. The fund is an extension of the ETF concept, but instead of a mutual fund, it is organized as a commodity pool. The fund is the first exchange-traded product that provides exposure to carbon emission markets without counterparty credit risk. Although shares of the fund may be bought and sold like other exchange-traded vehicles, there are some significant differences between this fund and more common products like ETFs and ETNs.

Fund facts
Inception date: Dec. 15, 2008
Expense ratio: 0.85%
Net assets: $5 million

Fund specifics
In contrast to a traditional ETF such as the SPDR (AMEX:SPY), the AirShares fund is passively managed and does not track an index; instead, it tracks a basket of exchange-traded futures contracts for European Union Allowances (EUAs), which permit the holder to emit carbon dioxide. The portfolio of the AirShares fund consists of a basket of up to four listed December EUA futures contracts. These investments are unleveraged and are collateralized by cash, cash equivalents, and U.S. government obligations.

Fund prospects and risks
The limited experience of the fund's manager and commodity trading advisor, who is responsible for trading the fund's futures contracts, are factors which may restrict the success of the fund. The trading activities of the fund also subject shareholders to currency risk, since the prices of EUAs and related futures contracts that the fund invests in are denominated in Euros. Additionally, futures trading can incur trading losses, which may reduce the value of the fund quickly. Whether the fund achieves capital gains or losses, an investment in a commodity fund is different from stock and bond investing, so it would be a good idea to consult your tax adviser about possible tax consequences.

In addition, because the fund is a commodity pool, shareholders do not have the protections provided to ETF shareholders under the Investment Company Act of 1940. Commodity trading is speculative, and the fund may not be suitable for many investors.

Unlike its direct competitor, the iPath Global Carbon ETN (GRN), the Airshares fund does not carry counterparty risk, which is a huge difference in these uncertain credit markets.

Market prospects
According to the World Bank, the global carbon market grew to a $64 billion market in 2007, more than doubling from 2006.

That rapid growth did not go unnoticed, as Morgan Stanley (NYSE:MS) announced plans to invest $3 billion to trade carbon. But this rapid growth slowed in 2008, and as oil experienced massive declines in price, carbon prices suffered similar drops. Investment banks revised their forecasts for the market, with Deutsche Bank (NYSE:DB) in mid-December cutting its expectations for European industrial emissions futures.

In a further indication of how much carbon trading has been impacted by the global economic slowdown, Credit Suisse (NYSE:CS) announced in late 2008 that it would cut its New York carbon team in half as a de-emphasizing of this business.

Even with the slowdown, the Kyoto Protocol requires ratifying nations to reduce their emissions of greenhouse gases or engage in emissions trading if they maintain or increase emissions of those gases. Companies with European operations could be impacted by emissions controls, such as global power company AES (NYSE:AES) and ConocoPhillips (NYSE:COP). The limitations imposed by the agreement provide support for carbon trading. However, supply and demand for EUAs may be impacted by many factors, including new technologies that curb carbon emissions and changes to the regulation of carbon emissions. All in all, a bet on this fund requires confidence in strong economic activity continuing in Europe.

Related Foolishness:

Learn more about mutual funds and ETFs with the Fool's Champion Funds newsletter service. A free 30-day trial will start you on the road to investing success.

Fool contributor Zoe Van Schyndel lives in the Seattle area, where she enjoys the coffee and natural wonders. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Morgan Stanley Stock Quote
Morgan Stanley
MS
$90.16 (-0.83%) $0.75
Credit Suisse Group Stock Quote
Credit Suisse Group
CS
$3.42 (-4.88%) $0.17
ConocoPhillips Stock Quote
ConocoPhillips
COP
$123.57 (-2.56%) $-3.24
Deutsche Bank Stock Quote
Deutsche Bank
DB
$10.63 (-1.67%) $0.18
The AES Corporation Stock Quote
The AES Corporation
AES
$28.20 (-1.45%) $0.41
SPDR S&P 500 Stock Quote
SPDR S&P 500
SPY
$398.63 (-0.92%) $-3.70

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.