FAN - FAN: The Wind Energy Slump Appears To Be Over Time To Tap In

2023-06-23 10:40:29 ET

Summary

• The First Trust Global Wind Energy ETF offers targeted exposure to the wind energy industry and has shown significant growth amid market downturns, with a 50% increase in returns in the past five years.
• Despite struggling since its inception, FAN outperforms its closest competitors and is popular among investors, with a higher average daily share volume compared to its peers.
• With improving macroeconomic conditions and a focus on Denmark, a leading pioneer in the wind energy space, the wind energy sector has the potential for growth and development in the long term.

Strategy

Launched and managed by First Trust Advisors L.P. in 2008, the First Trust Global Wind Energy ETF ( FAN ) invests in stocks of companies specifically targeting the wind energy industry. These companies typically operate across various sectors, including utilities, independent power and renewable electricity producers, independent power producers and traders, renewable electricity, and electric power by wind energy, to name a few. FAN invests in growth and value stocks of companies across diverse market capitalizations and seeks to track and replicate the performance of the ISE Clean Edge Global Wind Energy Index. The fund has been in operation for over 15 years and has accumulated an AUM of $266.31M. The index is rebalanced and reconstituted twice a year.

Holding Analysis

While FAN primarily focuses on the wind industry, the fund allocates about 60% of its portfolio to companies that are directly 'wind energy' companies and the remaining 40% to 'diversified sector' companies that may be indirectly involved in the industry. The fund selects and weights its holdings through a market cap methodology, and it allocates nearly 50% of its portfolio to the top 10 holdings. Within the top 10 holdings, higher weighting is given to the top 5 holdings as opposed to the latter 5. Weightings in the top 10 holdings range from 2% to 8%. FAN also has an extensive global focus, with Denmark leading at 15% and the United States trailing at 14%. The fund also invests in Canada, Portugal, Germany, Hong Kong, Italy, Spain, Japan, and Sweden. FAN mostly focuses on large-cap and mid-cap companies, with their weightings at 53% and 33%, respectively.

Performance Analysis & Peer Comparison

If we look at FAN's performance from a 10-year outlook, the fund is currently up 110%. It seems that the fund struggled to gain traction for nearly 7 years until it experienced a significant surge in its price at the end of 2020, exactly when the pandemic hit. However, this spike was short-lived, and in late 2020, the fund's price slowly began to decrease, and it has been on this same downtrend since.

More interestingly, the fund is ultimately down -39% since its inception in 2008. At its inception, its price was $29, but in less than half a year, its price plummeted nearly threefold, down to $9. This was likely due to the recession in 2008 and 2009. Moreover, FAN seems to have recovered very slowly, and it still has yet to reach its price at inception even at its peak in 2021. This leads me to believe that the fund lacks strong resilience and tends to underperform during and after market downturns.

While FAN's price may have struggled to gain traction in the past few years, the fund's Total Return tells a different story. The fund's return is up nearly 50% in the last 5 years, and it is currently outperforming three of its closest competitors. The fund is also up 4% in the last year in its return. Furthermore, FAN is relatively liquid compared to its peers. At an AUM of $266M, the fund is one of the largest wind energy ETFs among its peer group, only trailing GRID, with an AUM of $888M. However, FAN exceeds GRID when it comes to average daily share volume, with over 70,500 shares compared to GRID's 57,700. What makes this feat even more noteworthy is that FAN's share price is over a fifth of GRID's price, and GRID's AUM is nearly four times that of FAN's. This demonstrates that FAN is particularly popular among investors, despite not being the largest ETF in the sector.

Outlook On The Wind Energy Sector

Despite a strong shift toward adopting more renewable energy sources to combat climate change, the wind energy sector has experienced a tough couple of years, and it's difficult to determine whether it will be able to recover from significant losses last year. Many companies are realizing that it is difficult to profit from wind energy as research and development costs, along with the substantial investments required for constructing and maintaining large wind farms, can outweigh the returns in the short and long term. In addition to this, the sector's downturn in 2022 was further exacerbated by reduced tax incentives, rising interest rates, and high inflation.

In 2023, there's an air of optimism surrounding the industry as the economy slowly begins to recover, along with a steady reduction in inflation. The inflation rate sits at a comfortable 4.05% today, as opposed to a peak of 9.1% ten months ago. Moreover, the Federal Reserve may hold off on making large interest rate hikes, as significant progress has been made in curbing the inflation rate recently. There are also billions of dollars in new tax credits and subsidies toward clean energy investments as a result of the Inflation Reduction Act.

Thriving Industry In Denmark

FAN focuses over 15% of its portfolio on companies in Denmark, which can be beneficial as the country is a leading pioneer in the wind energy space. Between 2010 and 2021, the wind energy industry in Denmark grew by over 60% , mainly due to expansion to offshore wind infrastructure, and the country also produces twice as much wind energy per capita than the United States. Denmark produces 16.08 TWh from wind energy, which accounts for nearly 44% of the country's electricity consumption. Wind energy capacity in the country is forecasted to increase by a CAGR of 2% from 2021-2035, at which point wind power will account for 53% of the country's electricity consumption.

Conclusion

FAN offers targeted exposure to the wind energy industry across the globe. While the industry is inherently slow-growing, I believe that the sector has a lot of opportunities to grow and develop in the long term. Despite a tough ride since its inception and a -39% total return, FAN has shown significant growth amid market downturns, with a 50% increase in returns in the past 5 years. The fund seems to perform favorably among its closest peer competitors, and it also seems to be more popular among investors as the fund has a higher average daily share volume compared to its peers. After a slump in the sector in 2022, macroeconomic conditions have improved, which I believe will help the sector rebound in the near future. I rate FAN a Buy.

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