In the last few days there has been an onslaught of new ETFs and ETNs. The most interesting might be the iPath Global Carbon ETN ( GRN), a way to access the carbon trading market. GRN tracks something called the Barclays Capital Global Carbon Index Total Return. It will have a 0.75% annual fee and will not pay out any interest. Barclays provides a report on the iPath Web site -- and even if you have no interest in GRN for an investment, learning about the greenhouse gas issue is important. There is an increase in greenhouse gas emissions stemming from greater use of fuels like oil and coal in the running of businesses and other entities around the world. One solution to this problem is to tax (sort of) companies that exceed pollution allowances and reward companies that do not.
The rules for this stem from the Kyoto Protocol. Companies must buy carbon credits in the open market to "pay" for the excess pollution, which is pollution beyond specified allowances. Carbon credits can be bought from companies that do not exceed their pollution limits, or from speculators in the open market. As this does occur in a market, there is a market price that can go up or go down. GRN tracks that market price. Without turning this article into a political debate, chances are you know much more about this subject than you did five years ago. The five-year chart below, while it doesn't track the exact same index, is a proxy. It shows periods of extreme volatility, including a violent decline this year after a massive rally.
GRN strikes me as the first of its kind. As opposed to providing access to a stock market or a commodity, it instead offers exposure to a real world cost of doing business globally. As such, it seems like a real candidate for having a very low correlation to equities. The index correlations are a bit of a surprise. It has a 0.53 correlation to the S&P 500, 0.80 to MSCI EAFE, 0.39 to DJ AIG Commodity Index Total Return and -0.58 to Lehman US Aggregate Bond Index. I would have expected, or more correctly hoped for, a lower correlation to equities. I view GRN as an alternative asset. The real world aspect of the carbon market offers the chance for price movement that is independent of equity markets and as the chart shows, the price movement can at times provide equity-like returns. The combination of equity-like returns without equity-market exposure is an appealing proposition if equity markets continue to struggle. This was what I had in mind when I wrote aboutClimate Exchange PLC ( CXCHF) in March. Whatever you think about the greenhouse gas issue, CXCHF has traded in its own world since that last article, and I think GRN can do the same thing.
GRN should be expected to be very volatile. Because this is a first-to-market type of product, it makes sense to give GRN some time to let it prove that it can in fact be a proxy for the carbon market.
Now to bring in a little politics, people who do believe global warming is a problem might be inclined to view GRN as a one-way trade. The folks who are not concerned about global warming would view this is a poor investment. Even if the skeptics are right about the importance, it would seem that news flow and awareness will only increase, which provides a tailwind -- but not a one-way trade -- for all carbon indices. One last thing: GRN is a debt obligation of Barclays PLC ( BCS), the same Barclays whose stock price is down 40% year to date (far worse than that of the Financial Sector SPDR ( XLF)). The company recently raised $4.5 billion in capital, and some say more capital may be needed. I think a failure of Barclays is extremely unlikely, but anyone considering one of the iPath ETNs needs to follow the story.