On the most recent episode of ETF Prime, VettaFi’s editor-in-chief Lara Crigger discusses notable ETF launches in the first quarter of 2023 with host Nate Geraci. Bob Elliott, co-founder, CEO, and CIO of Unlimited talked hedge fund disruption and their hedge fund industry replication ETF. And lastly, Luke Oliver, head of climate investments and head of strategy at KraneShares, closed out with carbon allowance and offset investing opportunities.
The first quarter of 2023 had around 90 new ETF launches, slower than recent years.Geraci noted that alongside slower launches was a rise in ETF closures over last year’s first quarter.
“The number of new launches is down about 20% from last year; closures are up about 200%. That’s a lot of blood in the water,” Crigger said. Many of the closures came from one issuer trimming their expansive line-up, but the trend tracks with the challenged economic outlook of a higher rate environment alongside recession.
Changing Trends and Noteworthy ETF Launches
One standout trend for launches this year has been the number of active funds coming to market, about two-thirds of all new ETFs launched in Q1, in a continuing trend since the passage of the ETF Rule in 2019. Another notable trend has been the falloff of thematic ETF launches.
ETF launches that have stood out included the single-Treasury ETFs from F/M Investments like the US Treasury 6 Month Bill ETF (XBIL ) that launched last month, joining the lineup that includes the US Treasury 2 Year Note ETF (UTWO ) and the US Treasury 10 Year Note ETF (UTEN ). The funds follow a strategy that makes “a lot of sense for a certain kind of investor” according to Crigger for their on-the-run exposure to targeted Treasuries.
Another fund, while not particularly “flashy,” but that launched into an environment of strong fixed income appetite is the Vanguard Short-Term Tax Exempt Bond ETF (VTES ). Geraci noted that Vanguard launching a new fund is generally an occasion to take notice, even when it’s a more straightforward ETF and follows the trend of the rising popularity of fixed income.
The conversation turned to ESG fund launches and ESG sentiment before moving on to discuss the five recent ETF launches from Sprott that included the Sprott Nickel Miners ETF (NIKL ), the first ETF to focus on nickel miners, as well as a lithium, copper, and uranium miner ETFs and the Sprott Energy Transition Materials ETF (SETM ).
“We’ve had lithium, uranium, and copper miners ETFs on the market in the past, however Sprott’s versions of these are more pure-play than what was currently on the market,” explained Crigger. She doesn’t believe NIKL is interesting just for being the first of its kind but because “nickel is a really under-appreciated, yet extremely critical mineral when it comes to all sorts of next-gen technologies.” It’s also currently struggling with undersupply that has been exacerbated by the disruption caused by Russia’s ongoing war in Ukraine.
Capturing Hedge Fund Industry Performance in an ETF
Bob Elliott, co-founder, CEO, and CIO of Unlimited, discussed Unlimited’s launch of their ETF, the Unlimited HFND Multi-Strategy Return Tracker ETF (HFND ), and the deep wealth of knowledge of the hedge fund industry that Elliot and fellow co-founder Bruce McNevin brought to bear in creating the fund.
“We started with hedge funds because of our experience there, and frankly because there’s a real opportunity there right now with active management and coming off 15 years of unbridled monetary stimulation now turning to an era of tight money,” Elliott said. Elliott anticipates active management should perform strongly in this environment.
A strong suit of hedge fund managers has the ability to frequently provide differentiated returns that outperform indexes, but this comes at the cost of an extremely high fee structure. While beneficial to the manager, it is often to the detriment of the investor, according to Elliott.
HFND seeks to replicate the risk and return profile of the hedge fund industry within the ETF wrapper that offers lower cost diversification opportunities and a tax-efficient return stream for investors. The fund is actively managed and uses modern machine learning in a type of “sophisticated Monte Carlo simulation” or Bayesian model to analyze the hedge fund industry return stream to pinpoint individual factors such as macro, fixed income, etc. The model then adds back in fees to find a gross return and seeks to replicate that risk and return profile.
Carbon Investing Market Options and Opportunities
Last on was Luke Oliver, head of climate investments and head of strategy at KraneShares, who opened with an explanation that the carbon and climate suite appeals to both ESG-minded investors as well as those who are climate agnostic and instead are seeking diversification opportunities and smoother returns over time.
“What’s really important, and you said it at the beginning: climate-aligned. Everything in our climate suite is based on pure investment merit alone, and are all aligned with solving climate problems,” Oliver said. The suite invests in the opportunities that are arising from a decarbonizing global economy along three pillars: the carbon markets which are the engines of decarbonization, transition equities that will become industry leaders in the new economy, and being long core commodities vital to electrification.
The KraneShares Global Carbon Strategy ETF (KRBN ) offers exposure through the futures market to the largest, most liquid regulated carbon markets globally that set caps on how much entities can pollute each year, issuing a set number of allowances to each participant every year. Any amount of carbon dioxide pollution that the company goes above the limit, they are forced to buy more allowances to cover each ton of overage which are auctioned and then traded in the free market.
“This isn’t some niche, unusual, esoteric market. These traded about $900 billion last year, so this is an asset class,” explained Oliver.
“These programs are designed to tighten supply over time — imagine a Fed tightening cycle, or in this case a little bit like an easing cycle — into perpetuity,” Oliver said. “This is an investment in a large, liquid market that doesn’t correlate to hardly anything else, especially not equities or fixed income, and is engineered to go higher over time so you have a positive expected return.”
KraneShares also offers the KraneShares European Carbon Allowance Strategy ETF (KEUA ) and the KraneShares California Carbon Allowance Strategy ETF (KCCA ) as well as the KraneShares Global Carbon Offset Strategy ETF (KSET ) that invests in the voluntary carbon offsets or carbon credits market that is more akin to a frontier market for its nascence and volatility.
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