10-Q: COtwo Advisors Trust Reports Initial Q3 Performance

COtwo Advisors Physical European Carbon Allowance Trust reports its unaudited financial results for the quarter ended August 31, 2025, showing a slight decrease in net assets per share during its initial operational period.

Summary

• The Trust's investment objective is to reflect the performance of EU Carbon Emission Allowances (EUAs), less operational expenses.
• Investment operations commenced on June 17, 2025, and shares began trading on NYSE Arca on June 20, 2025.
• As of August 31, 2025, net assets totaled $2,538,983, with 150,000 shares outstanding, resulting in a Net Asset Value (NAV) of $16.93 per share.
• The Trust holds 29,700 EUAs with a fair value of $2,516,249, constituting 99.10% of net assets.
• For the period from April 29, 2025, to August 31, 2025, the Trust reported a net decrease in net assets from operations of $42.
• This operational decrease was primarily due to a $3,875 Sponsor fee, a $619 net realized loss from EUAs sold for expenses, and a $2,359 net change in unrealized depreciation on EUAs, partially offset by a $6,657 net realized gain from foreign currency transactions.
• The NAV per share decreased from $16.95 at the beginning of the period to $16.93 at the end.
• The market value per share decreased from $17.14 to $16.83, resulting in a total return at market value of -1.87%.
• The EUA market traded between 67.95 and 73.39 during the period from June 20, 2025, to August 29, 2025, with an average value of 70.73.
• 150,000 shares (3 Baskets) were created, and no shares were redeemed during the reporting period.

Sentiment

Score: 4

Explanation: The Trust, in its initial operational period, reported a net decrease in net assets from operations and unrealized depreciation on its EUA investments, leading to a decline in both NAV and market value per share. While a positive foreign currency gain was realized, the overall financial performance for this nascent stage is slightly negative. The fund's performance is tied to the volatile EUA market, and further operational history is needed for a comprehensive assessment.

Positives

• Successfully launched and listed on NYSE Arca on June 20, 2025, marking the commencement of trading operations.
• Received significant initial capital contributions totaling $2,539,025 through the creation of 150,000 shares, indicating investor interest.
• Generated a net realized gain from foreign currency transactions of $6,657, which positively impacted operations.
• The Sponsor contractually assumes most routine operational, administrative, and ordinary expenses, limiting direct cost burden on the Trust.
• Disclosure controls and procedures were evaluated as effective as of the end of the reporting period.

Negatives

• Experienced a net decrease in net assets resulting from operations of $42 for the period from April 29, 2025, to August 31, 2025.
• Reported a net investment loss of $3,721 for the period.
• Incurred a net realized loss of $619 from EUAs sold to cover expenses.
• Recorded a net change in unrealized depreciation on investment in EUAs of $2,359.
• Net Asset Value (NAV) per share decreased from $16.95 to $16.93 during the period.
• Total Return at Market Value was -1.87%, indicating a decline in market performance.
• The market price of shares occasionally traded at a premium or discount to NAV due to a small public float and limited trading activity.

Risks

• The price of EUAs is highly susceptible to global or regional political, economic, environmental, or financial events, including pandemics.
• Investor expectations regarding future inflation rates and movements in world equity, financial, environmental, commodity, and property markets can impact EUA prices.
• Demand for EUAs is affected by the activities and emissions of energy-intensive sectors such as manufacturing, oil refineries, power stations, and aviation.
• The supply of EUAs can be influenced by the rules of cap and trade programs outside the European Union and links between mandatory and voluntary schemes.
• Progress in innovation, introduction, and expansion of greenhouse gas emission reduction technologies can diminish EUA demand.
• Government policies encouraging or requiring greenhouse gas emission reductions, as well as political or governmental climate goals, pose a risk.
• The cost and implications of non-compliance with the European Union Emissions Trading System, including monetary and non-monetary penalties, affect market behavior.
• Investment and trading activities of hedge funds, commodity funds, and other speculators can introduce volatility.
• Interest rates and currency exchange rates, particularly the strength of and confidence in the Euro, impact EUA values.
• The ability of greenhouse gas emitting companies to pass on the cost of emissions credits to consumers affects EUA pricing.
• An investment in the Trust is concentrated in EUAs or cash, making it potentially more volatile than a broadly diversified portfolio.
• There is no assurance that cap and trade regimes will continue to exist, prove effective, or be renewed upon expiration.
• New technologies could arise that diminish or eliminate the need for cap and trade markets.
• High prices for carbon credits may incentivize companies to develop green technologies, suppressing demand for credits.
• The allocation of emission limits within cap and trade regimes can lead to significant price volatility.
• Unpredictable demand for products and services of EUA end-users (e.g., due to weather) can affect EUA values.
• If producers cannot pass on emission credit costs, they may reduce production, adversely affecting EUA prices.
• Regulatory changes and enforcement of cap and trade regimes, including non-enforcement of fines, could deteriorate incentives to purchase GHG credits.
• New regulations in developing cap and trade markets could negatively affect market value and liquidity.
• The Sponsor may change the valuation method used to calculate NAV, which could affect share value and lead to substantial losses for investors.
• A time gap exists at the end of each trading day where Trust shares trade on NYSE Arca but real-time EUA trading prices are unavailable, potentially causing discrepancies in the indicative fund value (IFV).

Future Outlook

Management expects the primary drivers of EUA price levels to continue to be overall weather patterns impacting demand for power (heating/cooling), the robustness of the EU economy, the ongoing conflict between Ukraine and Russia and its impact on natural gas flows and prices, the possible linkage of the United Kingdom Allowance market and the European Union Allowance market, and the introduction of the shipping industry to the EU ETS. Management also anticipates that the frequency and magnitude of the trading premium/discount to NAV will decline over time as more shares are issued.

Management Comments

• We expect the primary drivers of EUA price levels will continue to be (i) overall weather and how it will impact demand for power for heating/cooling demands (ii) overall levels of economic activity and how robust the EU economy is (iii) ongoing conflict between Ukraine and Russia and how that will impact flows and price of natural gas (iv) possible linkage of the United Kingdom Allowance market and the European Union Allowance market (v) introduction of shipping industry to the EU ETS.
• Over time as more shares are issued, we expect the frequency and magnitude of the trading premium/discount to NAV to decline.

Industry Context

The Trust operates within the European Union Emissions Trading System (EU ETS), which is the world's largest cap and trade system, covering over 11,000 power stations and industrial plants across 31 countries. The market for EUAs is significantly influenced by global economic conditions, geopolitical events such as the Ukraine-Russia conflict impacting natural gas supply, prevailing weather patterns affecting energy demand, and evolving regulatory frameworks for carbon emissions. Future developments, including the potential linkage of the UK Allowance market and the integration of the shipping industry into the EU ETS, are expected to further shape market dynamics and demand for EUAs.

Comparison to Industry Standards

• No specific comparisons to other comparable companies, projects, or global benchmarks were provided in the filing.

Related Party Transactions

• The Trust pays a Sponsor Fee to COtwo Advisors LLC (the Sponsor), a related party, equal to 0.79% per annum of the daily net asset value of the Trust, paid monthly in arrears. As of August 31, 2025, $1,666 was payable to the Sponsor.
• In exchange for the Sponsor fee, the Sponsor assumes most routine operational, administrative, and other ordinary expenses of the Trust.

Stakeholder Impact

• Shareholders experienced a slight decrease in NAV per share and a larger decrease in market value per share, exposing them to the volatility of EUA prices and foreign currency fluctuations.
• The Sponsor (COtwo Advisors LLC) benefits from a management fee (0.79% per annum of NAV) while covering most operational expenses.
• Authorized Participants facilitate the creation and redemption of Baskets in exchange for EUAs or cash, earning a $100 transaction fee per order.
• The Trust's investment activities contribute to the demand side of the European Union Emissions Trading System (EU ETS) market.

Next Steps

• Continue to monitor overall weather patterns and their impact on power demand for heating/cooling.
• Observe overall levels of economic activity and the robustness of the EU economy.
• Track the ongoing conflict between Ukraine and Russia and its impact on natural gas flows and prices.
• Monitor the potential linkage of the United Kingdom Allowance market and the European Union Allowance market.
• Anticipate the introduction of the shipping industry to the EU ETS.
• Expect the frequency and magnitude of the trading premium/discount to NAV to decline as more shares are issued.

Key Dates

Recommendation

The Trust is a newly launched investment product with a limited operational history, having commenced operations in June 2025. While the initial period shows a slight net loss and unrealized depreciation on its EUA investments, it also includes a positive foreign exchange gain. The performance is directly tied to the volatile EUA market, which is influenced by numerous external factors including economic conditions, geopolitical events, and regulatory changes. Given its nascent stage and the inherent speculative nature of its underlying asset, a 'hold' recommendation is appropriate for investors who have already invested or are considering it, allowing for more data points to assess long-term performance and market stability. The fund's objective is clear, and the operational structure appears sound, but the market for carbon allowances is inherently speculative.

Keywords

Carbon Allowances, EUAs, European Union Emission Trading System, ETS, Carbon Credits, Environmental Investing, ESG, Commodity Trust, Cap and Trade, Climate Change, Greenhouse Gas, NYSE Arca, Investment Trust, Financial Report, SEC Filing