ETFs
Can Renewable ETFs Continue to Outperform Oil & Gas?
Exchange-traded funds (ETFs) that invest in stocks linked to the energy transition have outperformed major funds linked to oil and gas companies over the past month, as the decline in oil prices since mid-April has pulled them downward. down the stocks of fossil fuel companies.
The rebound in clean energy ETFs is only just beginning. But that could come to a grinding halt if investor confidence deteriorates again amid persistently high interest rates, US political debate and divisions over ESG investing.
Rising interest rates over the past two years have been a major drag on renewable energy development, while the backlash against ESG investing in the US has prompted investors to withdraw billions of US dollars from funds clean energy, including ETFs.
But at least over the past month, all major clean energy ETFs have outperformed major oil & gas exploration ETFs by posting gains, compared to a 5% loss for the SPDR S&P Oil & Gas Exploration ETF & Production (NYSEARCA: XOP), one of the largest funds tracking oil and gas stocks, according to LSEG data quoted by Reuters columnist Gavin Maguire.
However, XOP won more than 10% year-to-date and 26% over the last year, driven by tightening oil markets with OPEC+ cuts and the ebb and flow of the geopolitical oil price premium since the start of the Hamas-Israel war last October. For comparison, the iShares Global Clean Energy ETF (NASDAQ:ICLN), although up 1.4% over the past month, is down 9% year to date and almost 25% over the past 12 months. Related: BP Hints Its Target to Cut Oil and Gas Production Could Be Flexible
Last month’s gains in clean energy ETFs could be short-lived, especially if the idea that interest rates are “higher for longer” persists and renewable energy companies continue to see their margins reduced due to high development and borrowing costs and falling clean energy prices. for consumers, analysts say.
An ETF linked to the energy transition has been a big winner over the past year: the Global X Uranium ETF (NYSEARCA: URA) has increased by 17% since the start of the year and 57% year-on-year, as many countries have restarted and accelerated their plans to install new nuclear power capacity to boost electricity production at low emissions.
Renewable energy funds as a whole have had a rough two and a half years since late 2021, as clean energy stocks have collapsed due to rising borrowing costs with higher rates and surging development costs due to supply chain issues.
Despite steady growth in renewable energy installations, the Morningstar Category of Alternative Energy Sector Equity Funds, which also includes ETFs, posted negative average returns of -11% in 2022 and -10.5%. in 2023, wrote Valerio Baselli, senior international editor at Morningstar. A analysis last month.
In the United States, uncertainty about the pace of growth in renewable energy has increased in the run-up to the presidential election. caused investors to withdraw money from funds invested in renewable energy stocks, so much so that these funds recorded the largest quarterly withdrawal on record in the first quarter of the year.
ETFs that invest in shares of renewable energy companies saw a combined outflow of $4.8 billion in the first quarter, according to LSEG Lipper data cited by Reuters.
Investor appetite for ESG funds in Europe remains stable, unlike in the United States, as Europe enjoys greater political and investor support for ESG investment products.
Still, global ESG funds recorded net quarterly capital outflows for the first time on record in the fourth quarter of 2023, according to Morningstar data. watch in February. Sustainable funds in Europe attracted capital flows in the fourth quarter, but investors withdrew $5 billion from U.S. sustainable funds in the final quarter of 2023, for a total of $13 billion over 2023, the data showed.
In the first quarter of 2024, investors withdrew a record $8.7 billion U.S. sustainable funds, making this the sixth consecutive quarter of capital outflows, wrote Mahi Roy, ESG analyst for Morningstar.
Two iShares passive funds accounted for half of those outflows, with investors withdrawing nearly $4 billion from the iShares MSCI USA ESG Select ETF SUSA and the iShares ESG Aware MSCI USA ETF ESGU during the first quarter.
The main factors behind record outflows from US sustainable funds included “high interest rates, lackluster returns in 2023, greenwashing concerns and the continued politicization of environmentally, socially and governance,” said Morningstar’s Roy.
By Tsvetana Paraskova for Oilprice.com