(Bloomberg) - A major exchange-traded fund tracking carbon credits that didn’t see a single outflow during the first year of its life is suddenly seeing large sums of cash slosh in and out.
For eight days starting late February, the $1.3 billion KraneShares Global Carbon Strategy ETF (ticker KRBN) posted a big inflow one day and a similar or even-larger outflow the next. The pattern finally broke in the latest data with a $52 million withdrawal, the second exit in a row.
An inflow followed by an outflow is not an uncommon event in ETFs, and is often the hallmark of a tax-friendly trade known as a “heartbeat.” But those tend to occur in isolation, with months between each.
“The action in this ETF has occurred over an extended period of time, which is more of an anomaly,” said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. “I don’t know what to make of it.”
One key factor may be the discount of the fund to the value of its assets. The ETF trades in New York, while many of its assets trade in Europe, meaning gaps frequently emerge between the two. Recently the fund has been trading at a discount. When this happens, an intermediary known as an authorized participant typically buys up shares of the ETF and then redeems them for assets in the fund -- this appears as an outflow. It doesn’t immediately explain the inflows, however.
The systematic nature of the flows suggests AP activity, rather than organic demand, according to Athanasios Psarofagis, an ETF analyst at Bloomberg Intelligence.
“It’s very, very odd, I don’t know if I’ve really seen anything like this,” he said. He also speculated that increased options activity may be playing a role, as both open interest and the volume of trading for options tied to the fund have risen recently.
Another factor is that the European carbon credits held by the fund have been roiled amid the fallout of Russia’s invasion of Ukraine. Their 10-day historical volatility has hit the highest since 2013, which could be affecting sentiment day-to-day.
Luke Oliver, head of strategy at the KraneShares, did not have a comment on the flow pattern specifically. He highlighted that the the net outflow from the fund in recent weeks has been muted considering the recent volatility in carbon markets.
“This is mainly because our investors are not looking at carbon as a trade, but as a long-term strategic allocation,” he said.
Dave Lutz, managing director at JonesTrading, said he thought that extreme moves in more established commodities may have investors looking for alternatives, contributing to the flow pattern.
By Elaine Chen
