Use KraneShares California Carbon ETF for Diversified Returns

KraneShares’ California carbon ETF has the potential to offer diversified returns.

The KraneShares California Carbon Allowance ETF (KCCA) provides targeted exposure to the California Carbon Allowances (CCA) cap-and-trade carbon allowance program. CCA future contracts have historically low correlations to traditional asset classes, making KCCA a suitable source for diversified returns.

KCCA has climbed 33.6% in the past year as of January 18. KCCA has garnered attention for its standout returns. However, cap-and-trade programs, also known as Emissions Trading Systems (ETS), also play a crucial role in decarbonizing economies and achieving net-zero goals.

“After 2023, many advisors are realizing that even in strong performing stock markets, some alternative strategies can add value,” Todd Rosenbluth, head of research at VettaFi, said. “This ETF provides exposure to the hard-to-obtain carbon allowance market and generates uncorrelated returns.”

What Is Compliance Carbon?

Compliance carbon can offer pure exposure to climate action as well as align with impact investment goals, according to KraneShares.

The cap-and-trade programs aim to reduce carbon emissions within the economies in which they operate. Therefore, by participating in these markets, investors help support price discovery and add liquidity, making the markets more efficient and effective, according to KraneShares.

Carbon prices are projected to rise dramatically, which means polluters either have to 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.

KCCA can be paired with the KraneShares European Carbon Allowance Strategy ETF (KEUA) to enhance risk-adjusted returns. KEUA offers exposure to the EUA’s program. The program is the world’s oldest and most liquid carbon allowance market.

See more: “Diversified Carbon Exposure Enhances Risk/Return Fundamentals

Investors need to understand that KCCA and KEUA offer exposure to carbon credits, not carbon offsets. Like carbon allowances, carbon offsets represent one ton of carbon dioxide or equivalent greenhouse gas. However, Carbon offsets generally operate outside of an emission trading scheme (ETS).

For more news, information, and analysis, visit the Climate Insights Channel.