Why Green Energy ETFs Are Slumping In May

Since the peak in January, exchange-traded funds (ETFs) focused on green energy have seen major declines after last year’s surge started to fizzle out.

The clean energy ETFs skyrocketed last year as investors turned to sustainable energy investments after governments pledged to “build back greener” from the pandemic and to achieve net-zero emissions within three decades.

This year, ETFs are still hot, but clean energy ETFs – not so much. Some of the most popular renewable energy funds have seen their performance slump by 30 percent so far this year.   

The decline in green ETFs is not indicative of the growing trend toward clean energy and Environmental, Social, and Governance (ESG) investing—this is a trend that will continue to generate interest for years and decades to come, analysts say. But experts think that the recent correction in the clean energy ETFs performance was necessary after the heights most of those funds reached last year. And anyway, the clean energy investment theme is one that will be the winner over decades, not days.

Flows into sustainable energy ETFs have subsided in recent months as investors look to pour money into other sectors of the economy that will benefit from the economic rebound this year, including in oil and gas ETFs. ProShares Ultra Bloomberg Crude Oil ETF (NYSEARCA: UCO) has surged by 30 percent year to date to May 11, while the United States Oil Fund LP (NYSEARCA: USO) has risen by 12.5 percent. Most of those gains are attributed to the rising oil price this year and to hopes that economies reopening will boost overall energy and oil demand later in 2021, after the oil sector was excessively punished by the 2020 crash and crisis.

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Clean energy ETFs, however, have declined in recent months after having soared in 2020. For example, Invesco Solar ETF (NYSEARCA: TAN) has dropped by 32 percent year to date, while the Invesco WilderHill Clean Energy ETF (NYSEARCA: PBW) has dropped by 26.6 percent.

Those funds surged by more than 200 percent each in 2020.

ETF managers and experts say the recent slump isn’t unexpected because, like other funds, those focused on green energy will also have ups and downs.

“When you think about the transformation to clean energy, we think about it over decades, not days,” John Hoffman, head of ETFs and indexed strategies for the Americas at Invesco, told CNBC’s program “ETF Edge” this week.

In the United States, investors now have nearly 100 ETFs focused on clean energy and ESG themes, Douglas Yones, Head of Exchange Traded Products at the NYSE, told CNBC.

America is catching up with Europe in terms of ESG investing in ETFs, Yones noted.

More inflows into clean energy ETFs would depend on greater institutional adoption of investment in funds tracking sustainable energy and ethical businesses, according to Yones.

There is a growing conversation between investors and financial advisors on whether investors should make sustainable energy ETFs part of their core portfolio, not just a fringe thematic investment, Yones told CNBC.

There is a drive toward ESG investments in the ETF space as customers and society demand sustainability, but clean energy ETFs are currently in a period of correction and recalibration after the 2020 surge.

Green energy ETFs have seen flows normalize as investors have turned their attention to expectations of rising interest rates, the near-term profitability of clean energy companies, and how those firms would fare in increased competition, including from Big Oil making forays into offshore wind, EV charging networks, hydrogen, and renewable power generation.

“In 2020, the [clean energy] thematic was very new and there was a rush toward clear ESG winners,” John Musk, an analyst with RBC, told Financial Times’ Leslie Hook.

“Whereas now there is a more balanced view, with more competition and more options for investors on this theme,” the analyst noted.

By Tsvetana Paraskova for Oilprice.com

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