Wind Turns On Clean Energy ETFs

The past month has not been kind to this recently hot segment.

[Editor’s Note: This article was one of ETF.com's most popular of 2021.]

The ongoing rotation—if we can fully call it that—out of growth and momentum names and into more value-y parts of the market has reached clean energy ETFs.

Many of these recently on-fire funds now sit among the worst-performing equity ETFs in the past month (excluding leveraged/inverse funds). It’s a performance that stands in sharp contrast to the rally we’re seeing in the energy sector this year.

Using the Energy Select Sector SPDR Fund (XLE) as a proxy for the sector, energy is up 24% in the past 30 days thanks to oil price gains and a cold winter across much of the U.S., pushing demand for fuel.

But clean energy funds are shelling out double-digit losses. Some examples include:

• iShares Global Clean Energy ETF (ICLN), down 15%
• Invesco Solar ETF (TAN), down 12%
• ALPS Clean Energy ETF (ACES), down 13%
• Global X Renewable Energy Producers ETF (RNRG), down 11%
• SPDR S&P Kensho Clean Power ETF (CNRG), down 12%

Nothing Fundamentally New

There seems to be no fundamental reason for the pullback more than concerns about rising interest rates and high stock valuations among growth segments.

A lot of clean energy stocks may look stretched. Remember that in 2020, these ETFs delivered blockbuster runs to the upside, with much of the enthusiasm centered on President Biden’s outspoken support of—and promised financial support for—the clean energy industry.

Funds like TAN and ICLN shelled out 233% and 141%, respectively, in returns last calendar year. For context, those gains came as the SPDR S&P 500 ETF Trust (SPY) rallied 18% that same year, and XLE actually dropped about 32%.

Charts courtesy of StockCharts.com

Asset Flows Hanging On

Investor dollars followed these ETFs to the upside. In 2020, ICLN saw net creations exceed $2.6 billion, and TAN picked up about $1.4 billion in net inflows, with most of the new assets coming in with gusto in the last quarter of the year. Other clean energy ETFs also enjoyed asset growth.

Now two months into the new year, nothing in the narrative has fundamentally changed. Government spending and supportive legislation are still very much on the table for the clean energy industry. But performance is hurting. It looks like, much as has been the case with the big growth winners of 2020, these ETFs too have faced some corrective action.

Interestingly, investor demand hasn’t really bailed on this segment. TAN has seen about $230 million in net redemptions in the past month, but ICLN is in the black, with net inflows of about $200 million during the month. The segment of clean energy ETFs, comprising only about 12 funds, today commands more than $18 billion in combined assets.

If you’d like to dig deeper and compare one-on-one some of these ETFs, check out our free ETF Comparison Tool, or find specific clean energy stocks you are interested in with our free ETF Stock Finder Tool.

Contact Cinthia Murphy at [email protected]