TAN - ICLN: Historical High Growth Geopolitics Renewables Make It Attractive

Summary

• Major funds (including ICLN) investing in stocks of renewable energy generators recorded strong price growth over the medium and long run.
• As we may assume, the future belongs to clean and green energy, and thus the companies operating in these sectors are poised for high growth.
• ICLN recorded a 4-year average yield of 1.23 percent with semiannual payouts. Thus, the fund is not suitable for income-seeking investors.

~ by Snehasish Chaudhuri, MBA (Finance).

iShares S&P Global Clean Energy Index ETF ( ICLN ) is an United States based exchange-traded fund ("ETF") that invests in equities of companies that are operating in the clean energy sector throughout the globe. 60 percent of its assets are invested in equities of companies based outside the U.S. The fund invests in common equities of companies that score high on Environmental, Social, and Governance ("ESG") parameters and promote environmental responsibility. This fund has recorded strong price growth over the years, but has generated a low yield. As there is more and more emphasis on renewable energy, and countries are moving towards clean and green energy, the future seems good for companies engaged in the business of generating renewables.

iShares Global Clean Energy ETF is a Low-Yielding Growth Seeking Fund

iShares S&P Global Clean Energy Index ETF was launched by BlackRock, Inc. (NYSE: BLK ) and is managed by BlackRock Fund Advisors. The fund tracks the investment results of the S&P Global Clean Energy Index ( SPGTCLEN ) and selects stocks through representative sampling techniques. SPGTCLEN is designed to track the performance of approximately 100 companies operating across utilities, independent power and renewable electricity producers, renewable electricity, alternative energy resources, biofuels, electric power by solar energy, electric power by wind energy, hydroelectric power generation, and clean energy sectors. The fund does not invest in equity shares of companies that lack social and environmental responsibility, such as companies operating in tobacco, controversial weapons, thermal coal, marijuana, drugs, etc.

iShares Global Clean Energy ETF is a low-yielding fund that generated an annual average yield of 1.23 percent over the past 4 years. Moreover, it pays a semiannual dividend. Thus, the fund is not a good option for income seeking investors. The fund, however, delivered good price growth. It registered a positive price growth during the past 6 months, a period when the broader market has largely been bearish and most funds recorded huge price loss. Over the past 3, 5, and 10 years, the annual average price growth was 22 percent, 18 percent and 13 percent, respectively.

Growth Prospect of Clean & Green Energy

In the United States, renewable energy is the fastest-growing source of electricity production. A report published by the U.S. Energy Information Administration ("EIA") during August, 2022, titled “EIA expects renewables to account for 22% of U.S. electricity generation in 2022,” mentions that:

“U.S. electricity generation from renewable sources, such as hydropower, wind, and solar, accounted for 20% of electricity generation both in 2020 and in 2021. We expect that share to increase to 22% in 2022 and to 24% in 2023 as more generating capacity from wind and solar come online and other generation sources, such as coal and nuclear, are retired.”

Renewable energy sources include wind, conventional hydropower, geothermal, solar, and biomass.

Over the years, renewable capacity, mostly solar and wind, kept increasing. In another report published by EIA during September 2022 titled “In the first half of 2022, 24% of U.S. electricity generation came from renewable sources," it mentions that:

“In 2021, a record amount of new utility-scale solar capacity was installed in the United States. From June 2021 to June 2022, 17.6 gigawatts ("GW") of new utility-scale solar capacity came online, bringing U.S. utility-scale solar capacity to 65.8 GW, according to our Preliminary Monthly Electric Generator Inventory . In June 2022, the United States had 137.6 GW of wind capacity, and 10% (14.3 GW) of that capacity was installed between June 2021 and June 2022. Based on planned additions reported to us by power plant owners and developers, another 7.0 GW of wind and 13.0 GW of solar capacity will come online by the end of the year.”

In the first half of this year, 24 percent of electricity generation in the U.S. came from renewable energy sources. The renewables' share was 21 percent during the first half of 2021. Some of the largest funds in terms of asset under management ("AUM") in the renewable energy sector are ICLN, First Trust NASDAQ Clean Edge Green Energy Index ETF ( QCLN ), and Invesco Solar Portfolio ETF ( TAN ). QCLN tracks the NASDAQ Clean Edge Green Energy Index and TAN tracks the MAC Global Solar Energy Index, both adopting full replication techniques. All the funds have generated strong price growth over the years. Only the return over the past year has been extremely poor, which again has been compensated by the positive price growth over the past 6 months. The future seems good for the companies generating renewable sources of energy, not only in the U.S., but throughout the globe.

Clean Energy Stocks of ICLN Showed High Volatility During the Past 1 Year

Portfolio of iShares S&P Global Clean Energy Index ETF consists of almost 100 stocks. But 60 percent of the entire fund is invested only in 16 stocks. As the fund performed poorly over the past 1 year, I’ll try to analyze the price performance of the component stocks of ICLN’s portfolio. While some of them generated huge price positive growth over the past 1 year, some others recorded exceptionally high price loss. Adani Green Energy Ltd (ADANIGREEN.NS) generated a return of 77 percent, the price of Centrais Eletricas Brasileiras S.A. (EBR)(L3XA.BE) grew by 58 percent, Absolute Clean Energy Public Company Limited (ACE.BK) rose by 48.5 percent, First Solar, Inc. (FSLR) rose by 32 percent, Consolidated Edison, Inc. (ED) rose by 22 percent, and the price of Enphase Energy, Inc. (ENPH) grew by 16.5 percent.

On the other hand, stock of Plug Power Inc. (PLUG) fell by 63 percent, Sunrun Inc. (RUN) fell by 58 percent, SolarEdge Technologies, Inc. (SEDG) and Xinyi Solar Holdings Limited (0968.HK), each recorded negative growth of 37 percent, price of Vestas Wind Systems A/S (VWDRY)(VWS.CO) fell by 30 percent, and the price of Ørsted A/S (DNNGY)(ORSTED.CO) fell by 28 percent. This implies that the stocks of companies engaged in the renewable energy business are highly volatile. A probable reason for this may be the news and regulations passed from time to time, that are expected to have a huge impact on these stocks. Although all these companies are in the business of renewable energy, but they are neither homogeneous, nor doing the same type of business.

Investment Thesis

iShares S&P Global Clean Energy Index ETF is a low-yielding fund with semiannual dividend. Thus, the fund is not a good option for income seeking investors. The fund, however, delivered strong price growth over the medium and long run. Companies operating in these clean energy sectors are poised for high growth. Almost 24 percent of electricity generation in the U.S. is coming from renewable energy sources, and this percentage will grow every year. All major funds (including ICLN) investing in stocks of companies engaged in generation of renewable energy generated strong price growth over the years.

Only the return over the past year was disappointing, primarily because of high volatility of such stocks. This trend has already been reversed by the positive price growth over the past 6 months. The future seems good for the companies generating renewable sources of energy, not only in the U.S., but throughout the globe. As a result of which, I expect this clean energy ETF to continue to deliver strong price growth.

The fund was trading over $100 a year back. After a series of strong downward rallies and relatively weaker upward rallies, the price stood below $65 almost a month back. Since then, the price has been moving up, and I expect the price to increase further, with minor hiccups in between. Thus, I believe that it's the right time to invest in the iShares Global Clean Energy ETF. However, income-seeking investors may not like the low yield.

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