In the release, XShares gave it all the earmarks of a failed business… “XShares Advisors LLC has carefully considered current market conditions and thereafter determined that, as a result of the Fund’s small size, inability to attract significant market interest since its inception and future viability, as well as the prospects for growth in the Fund’s assets in the foreseeable future, it was advisable and in the best interests of the Fund and its shareholders to liquidate the Fund.”

As per its description… This is a commodity pool that seeks to provide investors with investment results generally corresponding, before payment of ASO’s expenses and liabilities, to the performance of a basket of exchange-traded futures contracts for European Union Allowances (EUAs). An EUA is an entitlement to emit one metric tonne of carbon dioxide equivalent that is transferable under the European Union Greenhouse Gas Emissions Trading Scheme (EU ETS). The EU ETS is a cap-and-trade program that provides financial incentive for signatory countries of the Kyoto Protocol to reduce their carbon emissions.

The AirShares has actually held up in value since its January 2009 launch.  But the volume has been paltry at best.  There are some days it did not even trade shares, and the July 20 date with 8,600 shares trading hands was only the third most active day in the last three months.

This one had all the intentions of being able to offer a way into the cap-and-trade market for investors directly in an easy to trade ETF structure.  But it never took off.

We have noted before how many ETF and ETN products need to pursue reverse splits and some may even need to close.  You can join our open email distribution list to hear about key ETF developments, IPO’s, secondary offerings, mergers, key insider activity, and more.

JON C. OGG
JULY 24, 2009

Technically, a commodity pool and not an ETF.  AirShares seeks to provide results similar to the performance of a basket of four carbon credit futures contracts expiring December 2009 to 2012.  These carbon credits are certified by the European Union, issued by the European Union Emissions Trading Scheme (EU ETS), and allow the holder to emit one metric ton of CO2. 

This instrument can also be bought by individuals or institutions andwill allow individuals to not be required to set up a margin account topurchase the fund.   Because of the ETF-like construction, institutionswill be able to consider AirShares as an equity.

According to the World Bank, EUAs made up 78% of the value of thecarbon credits traded on the open market in 2007.  Thegovernment-issued EUAs that compose AirShares trade on the EuropeanClimate Exchange (ECX) in London.  In 2007, trading volume on ECXrepresented 83% of the total trading value of the EU carbon market. 

During the first nine months of 2008, the global carbon market grew 81%to $87 billion and is on track to clear $100 billion by year end,according to New Carbon Finance research released this October.  A Mayreport by Point Carbon expects the global carbon market to grow to $3trillion by 2020, assuming the U.S. develops a trading emissionsprogram.

ASO’s portfolio initially holds unleveraged long positions in ICEFutures or European Climate Exchange Carbon Financial InstrumentFutures Contracts.  AirShares is a passively managed equity product anddoes not track an index and it also seeks to hedge the currency riskassociated with fluctuations in the Euro/U.S. dollar exchange rate asthe futures contracts held by the fund and most of its assets aredenominated in Euros but these shares trade in U.S. dollars.

We would like to point you to a couple of sites before you start tryingto dig into a European exchange site.  One exchange we have used totrack these carbon certificates is the Chicago Climate Exchange.Americans may get a more simple understanding of some carbon basicsthere and then it will be easier to understand what the Europeans aretelling you.  You can also look at the Carbonfund.org site to get additional data for here in the U.S.

The good news is that investors can now get access to the carbonmarket.  The bad news is that this sounds like one of the morecomplicated exchanged-traded instrument structures, and that mightinfluence the demand and therefore the liquidity.  It really is notthat complicated at all, but it sounds complicated.  We have spoken onand off with some who are involved in these markets.There seems to be a concern that some feel the carbon market could fallvictim of the current liquidity and economic crisis seen in allcountries right now.  Many fear that the recession will trumpenvironmentalism. 

Jon C. Ogg
December 15, 2008