Recently there was progress for energy investments at the Paris Climate Conference, and subsequent bill H.R.2029 passed by the U.S. Congress. The latter allowed for the exportation of oil to places other than Canada for the first time in 40 years while furthering certain incentives for renewable energy investments. All of this would lead one to believe the investment landscape for companies in the sector seems bright. However any individual mutual fund, company, or ETF needs an analysis done of what it will do to the overall portfolio in addition to its merits for growth on its own. Diversifying means allocating among asset classes whose movements diverge from the other holdings based on their own industry potential and circumstances. This goal is harder to achieve than in decades past given our global economy. Below are three of the more prevalent energy plays in the market with an analysis of each.
iShares Global Clean Energy ETF Symbol ICLN
iShares Clean Energy ETF is down an average of 6.11% annually over the last 5 years to November 30th or cumulatively over -27% as of December 24th. Its expense ratio is 0.47% per year and is run by 4 managers through Blackrock’s team. Comprised mostly of smaller capitalization companies, its correlation to the S&P 500 over the last years is an ideal 0.56. Meaning 56% of its movements are similar to that of the index. This is likely given the size of its components and its concentration in an industry dependent on specific legislation and geopolitical events. It is also explained by its large 73.9% allocation to non U.S. stocks. The deviation on this position is approximately twice the market at over 21 meaning a return in a negative or positive territory up to 42% is not out of the realm in a single year.
Related: Morgan Stanley Joins The $20 Oil Club
Vanguard Energy ETF
Buying in to VDE at this point or continuing to hold it is essentially a play on the rebounding price of oil. Perhaps some rebound is merited given its steep drop over the past 18 months but beyond that is uncertain. OPEC recently put out its report quantifying oil’s possible price at just about $100 all the way out to the year 2040. If true we are certainly living in a whole new world for energy production and consumption. With this holding practically 100% of the positions are deeply embedded in the oil and gas production, exploration, and distribution industries. It’s a who’s who of the big oil names like Exxon, Chevron, Schlumberger & ConocoPhillips as its top 4 holdings which collectively represent over 45% of the entire holding’s assets. Still over the last 5 years it has managed to maintain an annualized positive return of 2.68%. And it’s correlation to the S&P is .67 giving it some room for independence from the broader market.
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Calvert Global Energy Solutions A
Calvert’s energy mutual fund is one of the only options in the energy sector that has managed to post a positive return annualized over the last 3 years. This coincides with its high correlation to the S&P 500 over that timeframe of 0.81. You are paying for active management here with an expense ratio of 1.85% even for it’s a share class. Calvert more so than the others here is a play on solar continuing to change our world, with 5 out of its top 10 holdings directly in the solar energy industry. And according to its website three quarters of the fund is either in the renewable energy or energy efficiency space. Still its deviation is over 15% per year which is 50% higher than the broader market, and a number of technology related scenarios playing out could change the run this fund has had recently.
There are a number of options in this industry now as it matures beyond just oil related investments. With none of the investment options here correlating to the S&P at over a 90% rate and the potential for substantial growth over time, perhaps some of these are worth a look.
By Tom Kool for Oilprice.com
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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is now working as news editor for Oilprice.com.