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iShares Global Clean Energy UCITS ETF: stick or twist?

This hugely popular thematic ETF takes big bets on a promising trend in a diversified way
iShares Global Clean Energy UCITS ETF: stick or twist?
  • iShares Global Clean Energy UCITS ETF has undergone some big changes to alleviate liquidity concerns
  • It now takes big bets on a promising trend in a diversified way

Few funds demonstrate the rise of the climate change agenda quite like the iShares Global Clean Energy UCITS ETF (INRG). The fund pulled in more than €2.5bn (£2.15bn) of investor cash last year on a net basis, marking a fierce uptick from the relatively modest interest previously generated since its 2007 launch. Some newer investors have been well rewarded by the fund, which generated a total return of 132.8 per cent in 2020.

But with cyclical stocks back in vogue some of 2020’s winners have been giving up ground this year. iShares Global Clean Energy UCITS ETF, for one, suffered a 26.5 per cent loss on a total return basis over the first four and half months of 2021.

Clean energy investors may well ask if this is a pause for breath or the start of a more worrying trend. Yet bigger questions need to be asked specifically of iShares ETF. Having ballooned in size, the sheer volume of money in the product has triggered a liquidity scare and a fundamental overhaul of what it can hold, something that may have inadvertently hurt performance. While the resulting changes are welcome, it is worth understanding what they mean and monitoring the evolution of its holdings over time – as you should with any thematic fund.

 

When size matters

Like some other thematic funds, this ETF may have appealed as a concentrated play on the stars of a rising sector. It tracks the S&P Global Clean Energy index, which until recently only had around 30 constituents. The ETF held 33 companies at the end of March, with big positions in Plug Power (US:PLUG), Enphase Energy (US:ENPH), Siemens Gamesa (SPAIN:SGRE), Verbund (AUS:VIE) and Vestas Wind Systems (DEN:VWS). These top five stocks alone represented 27.9 per cent of the fund’s assets and its top 10 holdings made up nearly half of the portfolio.

With billions flowing into this ETF and its even larger non-Ucits equivalent last year, elements of this approach became problematic. A bias to companies further down the market cap scale by the index they track meant that these two ETFs built up large stakes in certain smaller companies, causing serious liquidity concerns. Matt Brennan, head of passive portfolios at broker AJ Bell, notes that BlackRock funds had a combined ownership of nearly 19 per cent of Renewable Energy Group (US:REGI), a company in the S&P Global Clean Energy index, in late January this year.

This index has undergone several changes to address the problem, including the introduction of new methodologies which give greater weight to more liquid stocks. A more prominent change, which came into force in April, was an increase in the index's number of constituents from around 30 to a target of 100.

As a result, iShares Global Clean Energy UCITS ETF recently held 82 stocks. The prominence given to certain companies has also shifted, as illustrated by the fund's top 10 holdings before and after the overhaul (see table).

 

Cleaned up but not watered down

Clean energy shares could be in for a volatile ride if more cyclical names continue to dominate the agenda or other shocks emerge. Some investors have rightly paused for breath in recent months. But valuations and short-term hiccups aside, the iShares ETF remains a pure play on a promising long-term theme and now tracks a more appropriate index.

The changes made to the index should alleviate liquidity concerns and any worries that flows into this ETF and its non-Ucits equivalent are unduly pushing the prices of their holdings up or down. But the fund still offers a concentrated portfolio of promising clean energy stocks, many of which Investors' Chronicle has previously highlighted. In a nod to its pre-overhaul format, the fund’s top five holdings represented 29.1 per cent of assets on 14 May, with the top 10 making up nearly half of its assets.

What has changed is the composition of its top 10 holdings. Just four of these at the end of March – Plug Power, Vestas Wind Systems, Enphase Energy and Ørsted (DEN:ORSTED) – made the list as of mid-May. And some former top 10 holdings make up much less of the fund than they once did. The fund's position in Siemens Gamesa is down from 5.2 per cent at the end of March to 2.2 per cent in mid-May. And Plug Power, once the fund’s biggest holding, falls from a 7.7 per cent weighting at the end of March to 3.8 per cent.

Kenneth Lamont, senior research analyst at Morningstar, argues that the expanded index offers a more rounded investment proposition. "Most new additions, such as JinkoSolar (US:JKS), the largest solar manufacturer in the world, are clearly key players in the alternative energy space globally and should be considered welcome additions to the index," he says.

He adds that other new entrants such as TPI Composites (US:TPIC), a wind turbine blade manufacturer, are “clearly part of the alternative energy ecosphere".

Peter Sleep, senior investment manager at 7IM, adds that large utility names helping with the transition to cleaner energy such as NextEra Energy (US:NEE) and Xcel Energy (US:XEL) have also entered the fund. In his opinion, these companies should help to reduce the ETF’s volatility while boosting liquidity.

 

Top 10 holdings, before and after the overhaul

31/03/202114/05/2021
HoldingWeighting (%)HoldingWeighting (%)
Plug Power7.72Vestas Wind Systems8.23
Enphase Energy5.90Ørsted6.30
Siemens Gamesa5.19Xcel Energy4.95
Verbund4.84Iberdrola4.86
Vestas Wind Systems4.66Enphase Energy4.75
First Solar4.36Enel4.57
Daqo New Energy4.34NextEra Energy4.44
Meridian Energy4.23Plug Power3.79
Ørsted4.09SSE3.48
Contact Energy3.97SolarEdge Technologies3.47

Source: iShares

 

A good option

iShares Global Clean Energy UCITS ETF has plenty of competition. Lyxor New Energy UCITS ETF (NRJL) has also been running since 2007, and in the past year Invesco and L&G have launched clean energy UCITS ETFs.

Lamont notes that the Lyxor fund has a large-cap focus, while the Invesco and L&G ETFs invest further down the market cap scale – something that had caused problems for the iShares ETFs. Sleep suggests that investors seeking small-cap clean energy exposure may be best served by an active fund such as valuation-focused Ninety One Global Environment (GB00BKT89K74).

The iShares fund, meanwhile, has a much greater focus on utility companies than the Lyxor offering.

Different investors have different priorities and the transparency offered by ETFs, which tend to disclose all their holdings, at least enables you to conduct the necessary due diligence when picking a thematic fund. The iShares ETF may well experience further volatility, but it takes big bets on a promising trend in a better, more diversified format than it previously did.

So while it's always worth keeping a close eye on how the index it tracks may change, iShares Global Clean Energy UCITS ETF still stands out as a good vehicle for a clean energy play. Buy. DB