Clean Energy ETFs Slump as AI Takes Center Stage

Shares of clean energy ETFs have fallen over the past year as hype around more attractive themes, like artificial intelligence, have stolen investors’ attention away from the sector. 

Out of the clean energy sector’s 20 exchange-traded funds, only two had positive total returns in the trailing 12-month period, according to etf.com data. The largest, the $3.7 billion iShares Global Clean Energy ETF (ICLN), is down 28% over the same time frame.  

The sector’s sagging returns are likely due to investors moving on to other major themes, making the sector more vulnerable to rising interest rates, according to Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. 

“These are thematic, growth-oriented ETFs,” he said, adding that such funds are heavily influenced by trends in investor sentiment. “Investors should be in themes for the long haul if they believe in the underlying investment thesis.”  

Clean Energy ETFs Still Have Sound AUM 

While AI might be the new kid on the block, clean energy ETFs still have $8.9 billion invested in them. 

Over the last five years, ICLN has had a 16% annual return, buoyed by the passage of the Inflation Reduction Act, which increased investment in clean energy. This growth surpassed the SPDR S&P 500 ETF Trust (SPY)’s 11% return over the same period. 

If growth stocks aren’t being buoyed by investor interest, they can suffer from higher interest rates, which erodes future profit margins. The fall in returns has led to funds exiting the theme, with ICLN alone experiencing $614 million in outflows over the past year, a major reversal.  

“Clean energy flows skyrocketed in 2020 and 2021, increasing tenfold,” said Shaheen Contractor, senior ESG analyst for Bloomberg Intelligence. “The sector had to come down.” 

Contact Gabe Alpert at [email protected]