The good news about “eco-investing” these days is that investors have more choices than ever. The bad news is that none of the choices is perfect. All this came into focus this week with Earth Day celebrations and a carbon-free fund that went into registration.
The proposed fund, the FFI U.S. Large Cap Fossil Free ETF, is an interesting and innovative idea, but has serious limitations. It’s worth looking at this fund and at this eco-investing realm, as the climate-change issue isn’t going away, meaning the focus on alternative energy is likely to persist.
Moreover, some countries—like China and those in northern Europe—are pushing forward with wind and solar energy because they consider the development of those sources of energy to have national security implications.
Let’s start by looking at a chart comparing returns in the past year of the index underlying the proposed fund with returns of the SPDR S&P 500 ETF (SPY | A-98) and those of the Energy SPDR Select Sector Fund (XLE | A-98), the latter serving as a proxy for the exposure this proposed fund plans to eliminate. XLE, deeply in the red, has bombed in the past year as oil prices have plunged.
Again, the proposed FFI U.S. Large Cap Fossil Free ETF is basically a “subtractive” approach to the climate change issue. It will serve up S&P 500 exposure—minus all the hydrocarbon sinners of the world, which it has categorized in a listing cleverly called the “Carbon Underground 200.” That’s the main reason SPY’s returns in the chart below trail those of the FFI Index. In other words, SPY is weighed down by its 8 percent weighting to energy stocks and its 3 percent weighting to utilities.
Chart Courtesy of Bloomberg: Returns of Fossil Free Index vs. SPY and XLE in past 12 months
Filling The Holes
That’s all well and good, except it’s not allocating any investment capital to energy. That’s a huge blind spot for an investor, especially considering that coal, oil and gas have been at the very center of the industrial revolution. The point is, not investing in energy is tantamount to not investing in the future.
So, a few “additive” ideas are necessary to fill the gaping energy hole created by the carbon-free approach to that served up in the FFI U.S. Large Cap Fossil Free ETF. Thankfully, and true to the rich and diverse world of ETFs, myriad options are available on the market that could accompany this fund once it goes live.
I’m talking about niche funds, such as the following: