Is This ETF a Good Investment for a Green Future?

Is This ETF a Good Investment for a Green Future?

With energy prices squeezing consumers, it’s time to invest in clean technology. Is this iShares ETF the best investment for a green future?

The iShares Global Clean Energy ETF (NASDAQ: ICLN) aims to track the investment results of a benchmark index composed of global equities in the clean energy sector — the S&P Global Clean Energy Index. The war in Ukraine has highlighted the fragility of the world’s energy system making spending on renewable energy sources more urgent. As the world ramps up spending on green infrastructure, new opportunities arise. However, it can be overwhelming with the sheer number of stocks available. To ease the burden, we investigated whether this iShares ETF is the best investment for a green future. 

The bull case for the iShares Global Clean Energy ETF

iShares define megatrends as “powerful, transformative forces that can change the trajectory of the global economy by shifting the priorities of societies, driving innovation, and redefining business models”.  The company has identified five megatrends for the future, with clean energy being one of them. It is clear to see the importance of this trend when we look at the last five years. The S&P 500 averaged a return of 11.66% per annum, with the iShares Global Clean Energy ETF averaging a 17.47% return over the same period. Over the past year, equities have taken a hit, with the S&P 500 returning a loss of 17.56% year-to-date (YTD), while the ETF’s returns are at a much lower loss of 10.26%. This indicates that investors still like clean energy stocks, which traditionally trade at high multiples or generate losses. The portfolio pays a yield after deducting expenses of 0.88%, which may not be a lot, but it adds some cash to investors’ portfolios while they wait for the fund’s share price to bounce back.

The ETF is also well-diversified, protecting investors with no geographic diversification, as 54.54% of the fund is in stocks based outside the U.S. Geographic diversification is good for investors as, while systematic risk is almost impossible to protect against, some countries tend to fare better than others. The fund is spread across 12 different sectors that contribute to the development and implementation of clean energy, providing more stability for investors.

The bear case for the iShares Global Clean Energy ETF

Many clean energy companies are involved in the development and commercialization of new technologies, which may be subject to delays, cost overruns, or even failure to commercialize due to technological advances. This increases the risk that more reliable blue-chip or dividend ETFs don’t experience. While potential returns are high, so are the losses these companies face. 

As this is a global ETF, the portfolio also faces currency risk that is not present in ETFs that focus on the U.S. The fund’s net asset value is denominated in the U.S. dollar, meaning that if a currency the fund uses depreciates against the dollar, investors will receive lower returns during the conversion. 

The portfolio is also exposed to systematic risk. These are risks that a fund cannot diversify against, like a global recession. Economic activity in the European Union is slowing as unemployment and inflation remain high, China’s zero Covid policy has caused supply chain issues for the rest of the world, and rising interest rates in the U.S. are likely to cause a recession. These issues combined may hurt the valuations of growth stocks the most as the high price-to-earnings multiples they trade at will be their downfall.

Is the iShares Global Clean Energy ETF a Buy?

The portfolio faces numerous headwinds that are likely to occur but difficult to predict. The exceptional growth it has achieved in the past is also not a guarantee for future performance. However, in saying this, clean energy is experiencing a rise in investment and importance. Therefore, investors with a long-term outlook and appetite for risk may want to add this ETF to their watch list.

Quickfire round:

What exchange does the iShares Global Clean Energy ETF trade on?

The ETF trades on the NASDAQ under the ticker symbol ICLN.

What is the iShares Global Clean Energy ETF’s expense ratio?

The expense ratio is 0.42%.

Why is iShares Global Clean Energy going down?

We are currently in a bear market which has lowered the share prices of many stocks and ETFs due to fears of a recession.

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