There will always be 800-pound gorillas in every industry, and the US ETF market is no exception. The one difference with the ETF marketplace is that it has a relatively low barrier to entry. Moreover, the regulatory environment which includes the approval process at the SEC as well as listing rules at the exchanges, continues to make it easier for new participants to enter this market, and new issuers are lining up.
We have been seeing a number of anti-ESG funds launch recently like the Strive U.S. Energy ETF (DRLL) and the Strive 500 ETF (STRV) whose issuer has promised to not just vote shareholder proxies but also put as much pressure on company management as they can muster. September saw the launch of what I guess can be billed as an anti-anti-ESG fund, or in other words what seems to be an actual, factual, ESG fund that seeks to take the same activist approach but with a focus on decarbonization.
The Carbon Collective is a climate-focused robo-advisor that has been around since 2020 helping clients focus their investing dollars on companies. Given the increasing amount of pressure on companies to de-carbonize just about every aspect of their business it's not surprising that the Collective teamed up with white label issuer Tidal to launch the Carbon Collective Climate Solutions U.S. Equity ETF (CCSO) .
The fund, launched on September 19, 2022, touts a 35 basis point expense ratio meaning that a shareholder with $1,000 invested over a calendar year will pay $3.50 in fees over that period. On to the fund.
The fund is actively managed and as described on the fund webpage, seeks to help investors "level up from 'less bad' portfolios to holdings the companies actually solving our greatest global challenge, climate change." As there is no index for this fund, I ended up reading through the prospectus to learn more about the strategy, especially the security selection process.
This is where it gets interesting. The issuer starts with the complete list of U.S. equities and starts to fill functional buckets, including Green Utilities (minimum 50% renewable generation), Waste Management (minimum 50% methane recapture), Biofuel (minimum 50% exposure), Carbon Capture, and Sequestration (greater emphasis on sequestration), Water and Water Utilities (waste reduction, efficiency focus), and Plant-Based protein companies.
As indicated in some of the descriptions there is a minimum revenue threshold of 50% exposure. Regular readers know that I am generally looking for at least 80% revenue exposure for holdings in targeted exposure funds but, after taking a look at the issuer's research and crossing that list with current fund holdings, I found 69 of 194 portfolio names are tagged as "Pure Play", 46 passed the revenue threshold, one passed the landfill (methane capture) filter and one name passed the Contraceptive filter.
There are 77 names in the portfolio that are not included in the posted research coverage but looking through the names, there's nothing that jumps out at me as being out of place.
Another filter they have is the defense filter, which usually is a bright-line exclusionary filter on this type of fund. The difference here is this fund allows for sales to militaries if, and only if, the products sold help the military reduce its carbon footprint. One final filter that they have is one that all ESG funds should employ which is the Fraudulent Claims Filter, or as I like to call it, the greenwash test.
In reviewing the holdings I did see that 32 names in the portfolio have market capitalizations less than $75 million which could point to some liquidity issues once the fund gathers significant assets, but it also looks like those 32 names account for a mere 0.20% of the fund's weight based on the latest daily holdings file.
New Fund Jitters?
Source: Factset, All You Can ETF
The table, above, is meant to provide some proof about a topic I've talked and written about since 2008. Exchange Traded Fund Liquidity.
This models out a theoretical trade for $5,000,000 in CCSO. Although it doesn't seem to be explicitly stated in the prospectus or the Statement of Addition Information - at least I wasn't able to find it - based on the initial seed capital of the fund, it looks like the Creation/Redemption basket size is 5,000 shares of the fund, which, at 10:00 am on October 4, 2022, equaled $91.050.
This is important because there are still investors who would look at a fund like this, understand and like the strategy focus, but balk at putting in an order either because they feel the fund is too small and they don't want to be a large shareholder, or they are worried about moving the funds share price with a large ticket.
With regards to that $0.11 bid/ask spread, don't forget that posted Bid/Ask prices are like an MSRP of sorts, and investors are always encouraged to place limit orders inside those points, within reason if you expect your trade to get filled of course.
While it is true that placing a $5 million trade in CCSO is the equivalent of just over 3,000% of that fund's average daily value traded of shares that same principal amount equals just 0.14% of the average value traded in the basket of underlying securities of the fund. The liquidity of the underlying shares is important.
When there is an order imbalance in shares of common stock the way that is resolved is by the price of those shares moving to a level that appeals to both buyers and sellers and the trade gets made.
In an exchange-traded fund an order imbalance is resolved by market participants purchasing underlying shares of stock and delivering them to an Authorized Participant (AP) who then trades those equity shares with the fund issuer for shares of the fund. This is called the Creation/Redemption process and is how investment dollars are added and removed from a fund. It is also the mechanism by which the market helps keep a fund's share price in line with its Net Asset Value (NAV).
All of this is to say, once again, that if you find a fund in which you want to invest, don't let the fund's assets under management scare you from making that investment. Given the focus of CCSO and the vigor of the security selection process, if you are looking for an energy transition strategy for your portfolio then this fund is worth a closer look.