ETF Wrap: These clean-energy ETFs are surging after ‘handily’ beating the S&P 500 over the past three months

Clean-energy ETFs are outshining the S&P 500 index recently, getting another boost Thursday after an unexpected agreement in Washington on a bill that includes climate-related spending.

The iShares Global Clean Energy ETF ICLN, +7.02%, Invesco Solar ETF TAN, +7.27% and First Trust NASDAQ Clean Edge Green Energy Index Fund QCLN, +5.74% — the three largest U.S.-listed ETFs in clean energy — illustrate the recent outperformance, according to DataTrek Research co-founder Jessica Rabe. 

“All three clean-energy ETFs have handily outperformed the S&P over the last 3 months,” Rabe wrote in an emailed note dated July 26. “Most of the top 3 names in these large clean energy ETFs have seen upside earnings revisions for this year and next over the last 90 days.”

The rising confidence of analysts about the earning potential of renewable energy companies in 2022 and next year helps explain the ETFs’ outperformance compared to the broader U.S. stock market, according to the note. Expectations for accelerating earnings growth are generally important for growth stocks, particularly in “a tough market,” she said.

The S&P 500 index SPX, +1.28% has tumbled 15.6% so far in 2022, with the stock benchmark much harder hit than the iShares Global Clean Energy ETF, which was down 3.8% this year through Wednesday. The fund has gained 6.9% over the past three months, while the S&P 500 dropped 3.8% over the same period spanning from April 27 to July 27, FactSet data show. 

The Invesco Solar ETF has fared even better, eking out a gain of 0.2% this year through Wednesday, after soaring slightly more than 20% over the past three months. 

“The market place has taken a look at a space that’s been pretty battered broadly across the board,” said Rene Reyna, head of thematic and specialty product strategy at Invesco, in a phone interview. “We’ve started to see a little bit of a bounce back and recovery,” he said of clean energy.  

While the First Trust Nasdaq Clean Edge Green Energy Index Fund has sunk 15.9% this year through Wednesday, its gain of 9% over the past three months has trounced the S&P 500. 

“These ETFs rallied after Russia first invaded Ukraine towards the end of February as oil prices spiked,” Rabe said. “They peaked for the year in early April, but have held in over the last several weeks even as energy commodities have been volatile.”

Clean energy tends to trade in line with “growth, emergent-tech-type securities,” according to Invesco’s Reyna. For example, on Wednesday the tech-heavy Nasdaq Composite COMP, +1.12% rallied “pretty substantially,” closing up 4.1%, while the Invesco Solar ETF ended with a “pretty big” gain of 6.1%, he said. 

Clean-energy flows

Alternative-energy ETFs have seen almost $1 billion of net outflows this year through July 20, after attracting $5.6 billion from investors in 2021 and $5.9 billion of inflows in 2020, according to Tom Roseen, head of research services for Refinitiv Lipper. The biggest monthly outflows of 2022 were in January, with two months of net inflows this year in March and June, Lipper data show.

“I’m really surprised we haven’t seen more flows and more interest in clean energy,” given the disruption in the oil and gas market as a result of the Russia-Ukraine war, said Aniket Ullal, head of ETF data and analytics at CFRA Research, in a phone interview. 

Read: Commodity ETFs tumble on recession worries, but catch a rally on ‘Reinflation Day’

Clean energy is going to require “some structural change,” meaning it’ll take some time before reaching a scale where it can entirely replace traditional fossil fuels, according to Ullal.

“It’s been a tough year and half for these funds, and part of it is, they’re highly volatile,” said Bryan Armour, director of passive strategies research for North America at Morningstar, in a phone interview. “They own a lot of growth companies where the future cash flows are particularly unpredictable.”

But over the longer term, “clean energy is a really strong way to improve our energy security,” said Armour.

Surprise politics

In her July 26 note, DataTrek’s Rabe cautioned investors considering clean energy that they may want to hold off from putting fresh capital to work in this “disruptive tech theme” until after the U.S. midterm elections in November due to potential volatility stemming from policy uncertainty. 

“While the earnings revision data is promising,” she said, the clean-energy ETFs highlighted in her note peaked in early 2021 “just after Joe Biden was elected president and Democrats took control of [the Senate in addition to the House].” She said that the “Democrats’ pledge to raise green-energy investment drove investor enthusiasm in the space.”

“Conversely, renewable-energy companies recently sold off after Sen. Joe Manchin opposed a climate-focused spending package,” said Rabe. “Even though Republicans are expected to take back control of Congress, renewable energy is an increasingly important industry with economic benefits.”

But in an unexpected move, Manchin and Senate Majority Leader Chuck Schumer announced Wednesday that they’d come tp an agreement addressing climate, healthcare and taxes, according to an Associated Press report Wednesday evening. Manchin, a conservative Democrat from West Virginia, said the bill would invest in technologies for carbon-based and clean energy.

See: In surprise move, Manchin and Schumer announce health, energy, tax deal

The top two companies owned by the iShares Global Clean Energy ETF are Enphase Energy Inc. ENPH, +6.81% and SolarEdge Technologies Inc. SEDG, +3.85%, according to the DataTrek note dated July 26. As of Wednesday, Vestas Wind Systems was the third largest holding, followed by Consolidated Edison Inc., fund data on BlackRock’s website show.

Enphase ENPH, +6.81% and SolarEdge SEDG, +3.85% are also the top two holdings of the Invesco Solar ETF, with the third biggest being First Solar Inc. FSLR, +15.11%, Rabe noted.

First Trust Nasdaq Clean Edge Green Energy Index Fund’s top three holdings also include Enphase, plus Tesla Inc. TSLA, +2.21% and ON Semiconductor Corp. ON, +3.42%, she said.

Franklin Templeton’s head of ETF sales, Dan Muzzarelli, said by phone that there’s some overlap of companies held by clean-energy funds and the firm’s thematic ETFs. For example, the Franklin Intelligent Machines ETF IQM, +4.35% holds Tesla, Enphase, Samsung SDI Co. and SolarEdge, all stocks that tend to show up in clean-energy ETFs, he said. 

Read: Plug Power, Fuel Cell and solar stocks soar after Manchin changes course to back climate spending

The Franklin Intelligent Machines ETF gained more than 4% on Wednesday, bringing its July advance to 13.3%, FactSet data show, though the fund is down 28.6% to date in 2022.

“You certainly do see technology like semiconductors” enabling clean energy, according to Stacey Morris, head of energy research at VettaFi.

“From a clean-energy standpoint, clearly that’s an area that is going to gain more traction as the world focuses on decarbonization,” she said. “But the reality is that we’re not there yet, and, in the meantime, I think particularly natural gas is going to be very important in terms of meeting global energy demand.”

The iShares Global Clean Energy ETF and Invesco Solar ETF surged around 6% by Thursday afternoon, while the First Trust Nasdaq Clean Edge Green Energy Index Fund had jumped about 5%, FactSet data show, at last check.

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As usual, here’s your weekly look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data. 

The good…

…and the bad

New ETFs

• Innovator Capital Management announced July 25 that it was launching the Innovator Hedged TSLA Strategy ETF TSLH, +0.59%. The new fund, which seeks to provide “a risk-managed approach” to investing in Tesla, began trading Tuesday. The ETF’s portfolio will mainly consist of Treasury bills, with around 10% comprising a call option spread on Tesla using “FLEX Options.”
• Touchstone Investments said July 25 that it was offering four actively-managed ETFs, including Touchstone Strategic Income Opportunities ETF SIO, +0.84%, Touchstone US Large Cap Focused ETF, Touchstone Dividend Select ETF and Touchstone Ultra Short Income ETF.

Weekly ETF reads