The Global X Carbon Credits Strategy ETF (NTRL) is an exchange-traded fund that provides investors with exposure to carbon credits markets established by cap-and-trade emissions schemes. The fund, which started trading on May 25, invests in futures that track four carbon credits markets: the European Union, the United Kingdom, California, and the Regional Greenhouse Gas Initiative (RGGI) in the Northeastern U.S.
With an expense ratio of 0.39%, the NTRL ETF joins six other carbon-credits ETFs, collectively managing $926 million in assets, according to data from etf.com.
Global X anticipates that carbon futures will grow as an asset class due to increasing pressure to address the climate crisis. The company expects carbon credit prices in the European Union, the largest market, to rise to over €120/ton by 2030, up from under €100/ton in 2022.
Cap-and-trade programs, also known as emissions trading schemes, establish emission quotas for companies. If a company emits below the specified limits, it can trade its excess credits to other companies that cannot meet the limit. This system incentivizes companies to reduce emissions beyond their targets to sell the surplus credits, promoting innovation.
Yili Wu, sustainable investing strategist at Global X, describes carbon credits as a unique asset class with low correlation to other asset classes such as U.S. equity, crude oil, and various fixed income instruments. Carbon futures are not strongly tied to economic factors like commodities; instead, their markets are primarily influenced by the decisions of legislators and regulators who establish and manage these cap-and-trade programs.
The NTRL fund currently allocates 52.6% of its assets to futures tracking the EU carbon markets, 20.5% to California’s carbon market, 19.6% to the U.K. markets, and 4.9% to the RGGI. The fund aims to limit exposure to the EU markets to around 50% since they make up approximately 87% of the total carbon credits markets.
China represents a significant potential area for growth, as it launched an emissions trading scheme in 2022. As the scheme expands to include more industries, the total carbon credit market could increase by 70%. However, it may take a few years before derivatives tracking China’s market become available.