Investment Thesis
iShares Global Clean Energy ETF (ICLN) warrants a hold rating due to numerous current barriers for the global clean energy industry. Domestically, the United States faces challenges in the growth and profitability of its wind and solar industries. On the international front, Europe and Asia also encounter unique challenges, including the prevalence of fossil fuels and geopolitical issues. Therefore, while ICLN and comparable clean energy funds may yield strong returns in the future, there are significant near-term challenges.
Overview of ICLN and Comparable Funds
ICLN is a passively managed exchange-traded fund that tracks the S&P Global Clean Energy Index, striving to mirror the performance of clean energy equities worldwide. Since its inception in 2008, the fund has amassed 136 holdings and $2.17B in assets under management (AUM). Its portfolio includes renewable electricity companies, electric utilities, and semiconductors. Geographically, ICLN is heavily invested in U.S. companies but also holds positions in China, Denmark, and various other countries.
Other funds examined for comparison are Invesco Global Clean Energy ETF (PBD), VanEck Low Carbon Energy ETF (SMOG), and SPDR S&P Kensho Clean Power ETF (CNRG). These funds also focus on clean energy and power and have global holdings.
Performance, Expense Ratio, and Dividend Yield
The energy sector has experienced volatility over the past five years. In the U.S. market, it was the worst performing sector in 2020 but significantly outperformed the S&P 500 Index with a 53.4% return in 2021. Since then, global energy holdings have declined, resulting in current prices. ICLN has an average 5-year annual return of 8.69%, while PBD has underperformed with a return of 5.30%, and CNRG has outperformed with a 15.42% return.
ICLN has a lower expense ratio than its peers at 0.41%, while its dividend yield of 1.90% is average. However, its dividend growth has been the lowest, with a 1.54% 5-year CAGR.
ICLN Holdings and Current Challenges
ICLN is the most diversified global clean energy ETF with 136 holdings. However, it is relatively concentrated in its top 10 holdings, which constitute 48.3% of the fund. Despite promising potential among some of ICLN’s top holdings, the overall outlook for global clean energy is less optimistic.
Struggles with U.S. Domestic Clean Energy
The U.S. domestic clean energy industry faces an uphill battle despite government incentives. High costs, low demand, and an established fossil fuel infrastructure pose significant challenges.
Globally, the Situation Isn’t Much Better
The current situation in Asia and Europe is also bleak for clean energy. Southeast Asia, while expecting an increase in energy demand, remains heavily reliant on fossil fuels. In Europe, renewable energy sources make up a significant portion of power production, but the region is still dependent on imported fossil fuels.
Current Valuation and Analyst Rating
ICLN has underperformed peer funds over the past year. However, its recent price decline has resulted in a relatively favorable valuation. Given the near-term challenges in both U.S. and global markets, ICLN is expected to continue experiencing suboptimal returns. Therefore, the fund is rated as a hold.
Risks to Investors
Investors should be aware of the opportunity costs and volatility associated with clean energy ETFs like ICLN. While the long-term outlook for clean energy is promising, fossil fuels are likely to continue meeting energy demands for at least the next decade.
Concluding Summary
Globally, the future will be dominated by clean energy. However, fossil fuels will likely satisfy energy demands for at least the next decade. As a result, there are clear roadblocks impeding profits in North America, Europe, and Asia. These obstacles include current high costs for clean energy, stunted demand, and the prevalence of fossil fuels. While it is likely that these roadblocks will subside over the long term, short term it means suboptimal returns for ICLN and similar ETFs.
