Clean Energy ETFs Take a Hit, but Money Keeps Flowing In

Source: By Michael Wursthorn, Wall Street Journal • Posted: Tuesday, June 29, 2021

Exchange-traded funds that track renewable-energy indexes have posted double-digit declines this year

Clean energy stocks rallied after last year’s presidential election as investors bet the Biden administration would hasten the U.S.’s transition toward wind and solar energy. Photo: natalie behring/Reuters

Investors have lost a bundle this year betting on solar-panel and wind-turbine makers. Their response: to double down.

A year ago, green stocks and the funds that track them rallied tremendously after the market’s recovery from a pandemic-induced swoon.

Solar-panel and wind-turbine companies were among firms benefiting from a surge of investor- and consumer-driven demand for renewables, despite many being small unprofitable ventures.

This year, returns are trailing the broader stock market. That is thanks, in part, to stocks having run so far and uncertainty around the Federal Reserve’s interest-rate course and how its actions may ultimately affect growth stocks.

Exchange-traded funds that track renewable-energy indexes have posted double-digit declines this year. BlackRock’s iShares Global Clean Energy ETFhas fallen 16% since December; Invesco Ltd. ’s popular Solar ETF has posted a roughly 11% decline.

Even so, money continues to pour in.

Professional money managers and individual traders have invested $6.2 billion in green-energy ETFs this year, according to data from Refinitiv Lipper as of last week.

The inflows are on course to eclipse last year’s record $7.2 billion.

Index makers and asset-management firms say that, for now, large pullbacks in share prices don’t reflect investors’ desire to bet on green companies.

“It’s an area where we see continuous demand,” said Ari Rajendra, a senior director of strategy and volatility indexes at S&P Dow Jones Indices.

At BlackRock, the world’s largest asset manager, clean energy funds reported $2.7 billion in inflows this year and $1 billion into a European clean-energy fund, according to FactSet data as of last week. Interest was so high that S&P had to broaden its clean-energy benchmark used by BlackRock funds to fix the problem of having too much money in mostly small, hard-to-trade companies.

Such changes don’t happen often, said S&P’s Mr. Rajendra, but intense demand from investors warranted the index’s revamp to 82 stocks from just 30. The firm also lowered the criteria for the inclusion of stocks, among other things.

Ross Gerber, chief executive of Gerber Kawasaki Wealth & Investment Management, said renewable-energy stocks, from solar-panel makers to manufacturers of alternative batteries, will eventually transform transportation and other facets of everyday life.

A solar farm in Maine. With clean energy stocks pricey, they and funds that track them may be more vulnerable to market or political changes. Photo: Robert F. Bukaty/Associated Press

Mr. Gerber has put more client cash into Invesco’s clean-energy fund, contributing to the $446 million of total inflows into the ETF this year, as of last week. He shuns oil stocks, which are among the stock market’s best performers this year.

“The more speculative the stock, the higher the valuation. But in this market, people care more about fantasy than reality,” said Mr. Gerber. “So with solar, you have a little bit of the fantasy in there, too.”

Invesco’s solar ETF jumped 233% in 2020, while BlackRock’s global clean-energy fund soared 140%—easily the best years ever for both as valuations of green stocks climbed to dizzying heights.

Although both funds have declined in the year to date, valuations are elevated.

Invesco’s solar ETF trades at a forward price/earnings ratio of 36, versus 21 for the S&P 500, according to FactSet.

Meanwhile, clean-energy companies trade at a 70% premium to traditional energy companies based on a ratio of enterprise value to earnings before interest, taxes, depreciation and amortization, a standard valuation yardstick, strategists at Bank of America said.

They noted this valuation was down from highs earlier this year but still well above the five-year average.

With stocks pricey, they and funds that track them may be more vulnerable to market or political changes. Their allure may dim, for example, if the Fed begins to raise interest rates earlier than expected, taking some of the shine off growth stocks.

Or volatility could increase if there are hiccups for a $1 trillion infrastructure planagreed to by President Biden and some U.S. senators.

Green stocks rallied last year after Mr. Biden won November’s presidential election, as investors bet the new administration would hasten the U.S.’s transition toward wind and solar energy and away from fossil fuels.

Investors already are experiencing some of that volatility. Clean-energy stocks have rallied alongside growth stocks in recent weeks.

Invesco’s solar fund is up nearly 15% over the past month, while BlackRock’s ETF has added 3.2%.

The willingness of investors to continue pouring money into this part of the market shows they are positioning for a potential longer-term readjustment of the energy sector and economy.

Rene Reyna, head of thematic and specialty product strategy at Invesco, said expectations are premised on a belief that technology will eventually bring the cost of batteries, solar panels and other green efforts down enough to garner wider adoption—and big profits.

Construction at a wind farm in New Mexico last year. Clean energy companies trade at a 70% premium to traditional energy companies. Photo: Cate Dingley/Bloomberg News

In that sense, clean energy is the “hope trade,” he said.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com