2023-03-06 12:30:00 ET
Summary
- Economic optimism in Europe has fueled a bullish run in EU carbon credits.
- The KRBN ETF has underperformed for a few reasons I spotlight.
- I also outline key price levels to watch on the near-term chart of KRBN.
The cost to purchase carbon allowances in Europe recently ticked near fresh highs after a mid-year swoon in 2022. The surge from under €70/ton to the February peak of €100.70/ton came as economic optimism across the pond jumped following some strong industrial output figures.
Prompt-Month EUA Futures Price History: Big Rally Off The September Low
Bigger picture, the EU carbon credit allowance price is near its all-time peak while the California market is off the spike highs from early 2020. One ETF tracks these markets and was once a very hot trade, but I notice that volume has come out of KRBN over the last year. Let's dig deeper for a refreshed look at the product.
European & California Carbon Credit Market Price Histories
According to KraneShares , the Global Carbon Strategy ETF (KRBN) is benchmarked to IHS Markit's Global Carbon Index, which offers broad coverage of cap-and-trade carbon allowances by tracking the most traded carbon credit futures contracts. The index introduces a new measure for hedging risk and going long the price of carbon while supporting responsible investing. Currently, the index covers the major European and North American cap-and-trade programs: European Union Allowances (EUA), California Carbon Allowances ((CCA)), the Regional Greenhouse Gas Initiative ((RGGI)), and United Kingdom Allowances (UKA).
KRBN Portfolio
KRBN is down about 3% in the last year, underperforming the carbon allowance markets. KRBN must go out and purchase contracts in these markets, so it may be negatively impacted by what's known as negative roll yield during periods of contango - that's when near-dated contracts are priced under longer-dated contracts. Thus, there's a loss when KRBN must sell the expiring prompt-month and buy the pricier out-months.
EUA Futures In Contango
ICE
Also, currency changes impact KRBN as it has high long exposure to the euro.
Weaker Euro From A Year Ago: A Negative Factor For KRBN
Finally, I dug and found KRBN traded at a premium to its NAV in early 2021, but now sells near NAV. All of those factors have likely weighed on the fund even as near-term futures prices have bounced.
KRBN Traded At A Premium To NAV Early On
Turning to price action, KRBN tends to perform well in Q2. Data is admittedly limited, but the ETF has never experienced a negative April, May, or June, though March can be shaky. Perhaps traders look to play what is always an uncertain summer period for Europe and the Western USA through this product.
KRBN: Bullish Seasonality Ensues In April, But Limited History
The Technical Take
KRBN has been in consolidation mode for the better part of the last year. I see a descending triangle pattern which is thought to eventually resolve in the trend of a larger degree - which would be higher in this case since the prior trend, almost since the inception of the ETF, was up. Key support is seen in the $34 to $36 range while resistance is currently near $46.
The long-term 200-day moving average is negatively sloped, which is a bearish signal. Critics will argue that the large $8.3553 distribution paid at the end of last makes the chart less meaningful. Including that distribution still leaves the share price about 15% under the all-time high from a year ago.
KRBN: Downtrend Off The Early 2022 All-Time High
The Bottom Line
KRBN is fighting contango right now, though a rebounding euro helps the product. With shares near NAV and a downtrend in place, I am a hold on KRBN here. A constructive move would be if the ETF dipped to mid-$30s support or rallied above the mid-$40s with momentum.
For further details see:
KRBN: Consolidating After A Large December Distribution Amid High Carbon Allowance Prices