Inflation Hedge Remains Critical Component in Portfolios

The latest economic data shows inflation remains stubborn, suggesting investors may want to maintain exposure to an inflation hedge.

Consumer prices increased 3.1% in the year through January. While this represents a slight cooling from the 3.4% reported in December, it’s higher than the 2.9% that economics had forecasted.

Core prices, which excludes volatile food and energy, held roughly steady in the year through January. As inflation stays sticky, it’s not too late to add an inflation hedge to portfolios.

The KraneShares California Carbon Allowance ETF (KCCA) can potentially serve as a hedge against inflation through a price floor that is pegged to inflation rates. This means the price floor rises 5% plus CPI, according to KraneShares.

KCCA offers targeted exposure to the California Carbon Allowances (CCA) cap-and-trade carbon allowance program. This is one of the fastest-growing carbon allowance programs globally.

The carbon cap-and-trade market is designed to lower emissions by 5% per year from 2021 to 2030. Furthermore, between 2015 and 2020, the program reduced greenhouse gas emissions by around 3% a year, according to the Center for Climate and Energy Solutions (C2ES).

See more: “Under the Hood of Ocean Engagement ETF ‘KSEA’

Additionally, CCA future contracts have historically low correlations to traditional asset classes, making KCCA a source for diversified returns.

Carbon prices are projected to rise dramatically, which means polluters must decarbonize their business operations or take on higher costs to source allowances. According to KraneShares, these higher prices also drive fuel switching and more capital toward green innovations.

Complement Exposure With KEUA

Investors can complement their exposure to the CCA program with the KraneShares European Carbon Allowance Strategy ETF (KEUA). The fund offers exposure to the European Union Allowances program, which is the world’s oldest and most liquid carbon allowance market.

See more: “KraneShares Expects Demand for EUAs to Increase in Second Half

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