Can Renewable ETFs Continue To Outperform Oil & Gas?
Exchange traded funds (ETFs) that invest in stocks related to the energy transition have outperformed the major funds tied to oil and gas firms over the past month as the decline in oil prices since mid-April dragged down shares of fossil fuel companies.
The rebound in clean energy ETFs has just begun. But it could stop in its tracks if investor sentiment sours again amid persistently high interest rates and the U.S. political debate and divisions over ESG investments.
The rising interest rates of the past two years have been a major drag on renewable energy developments, while the backlash against ESG investments in the United States has prompted investors to pull billions of U.S. dollars out of clean energy funds, including ETFs.
But at least in the past month, all major clean energy ETFs have outperformed the main oil and gas exploration ETFs by posting gains, compared to a 5% loss for SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA: XOP), one of the largest funds tracking oil and gas stocks, according to data from LSEG cited by Reuters columnist Gavin Maguire.
However, XOP has gained more than 10% year to date and 26% over the past year, driven by tighter oil markets with the OPEC+ cuts and the ebb and flow of the geopolitical premium in oil prices since the Hamas-Israel war began last October. To compare, iShares Global Clean Energy ETF (NASDAQ: ICLN), while up by 1.4% over the past month, is down by 9% year to date and nearly 25% over the past 12 months.
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The past month’s gains of the clean energy ETFs could be short-lived, especially if the view of ‘higher for longer’ interest rates persists and renewable energy firms continue to see their margins squeezed by high development and borrowing costs and lower prices of clean energy for consumers, analysts say.
One ETF connected with the energy transition has been a major winner in the past year—Global X Uranium ETF (NYSEARCA: URA) has gained 17% year to date and a massive 57% in one year as many countries revived and accelerated plans to install new nuclear energy capacity to boost power generation with a low-emission profile.
Renewable energy funds as a whole have had a difficult two and a half years since the end of 2021, as clean energy stocks slumped amid rising borrowing costs with higher rates and soaring development costs with supply-chain issues.
Despite constantly growing renewable energy installations, the Morningstar category of sector equity alternative energy funds, which also includes ETFs, posted negative average returns of -11% in 2022 and -10.5% in 2023, Valerio Baselli, Senior International Editor at Morningstar, wrote in an analysis last month.
In the United States, uncertainty about the pace of renewable energy growth with the presidential election approaching has pushed investors to withdraw money from funds invested in renewables stocks—so much that these funds booked the biggest quarterly withdrawal ever in the first quarter of the year.
ETFs that invest in stocks of renewable energy firms saw a combined outflow of $4.8 billion during the first quarter, according to LSEG Lipper data cited by Reuters.
Investor appetite for ESG funds in Europe remains steady, unlike in the U.S., as Europe has higher political and investor support for ESG investment products.
Still, global ESG funds saw net quarterly outflows for the first time on record in the fourth quarter of 2023, Morningstar data showed in February. Sustainable funds in Europe attracted inflows in Q4, but investors pulled $5 billion from U.S. sustainable funds in the last quarter of 2023, for a total of $13 billion over 2023, according to the data.
In the first quarter of 2024, investors withdrew a record $8.7 billion from U.S. sustainable funds, making it the sixth consecutive quarter of outflows, Mahi Roy, an ESG analyst for Morningstar, wrote.
Two iShares passive funds accounted for half of these outflows as investors pulled nearly $4 billion from iShares MSCI USA ESG Select ETF SUSA and iShares ESG Aware MSCI USA ETF ESGU during the first quarter.
The key factors behind the record outflows from U.S. sustainable funds included “high interest rates, middling returns in 2023, greenwashing concerns, and the continued politicization of environmental, social, and governance-focused investing,” Morningstar’s Roy said.
By Tsvetana Paraskova for Oilprice.com
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