Revisiting Clean Energy Mania

February 4, 2022

In a blog published last February, we noted that the Invesco Solar ETF (ticker: TAN)1, the top performing non-leveraged ETF in 2020 with a return of 234%, was a potential signal that clean-energy investing had become a mania as its surge higher in price attracted more and more investors. We cautioned readers that such speculative bubbles can be part of a pattern often experienced in the early phase of large-scale changes brought on by technological innovation.

Our concerns from a year ago have been confirmed as illustrated in the chart below (Table 1). In the one-year period ended this past Monday (1/31/22), the price of TAN has declined by -39.8%, and four of the largest clean energy ETFs (ranked by market capitalization)2 have also fallen sharply in value. In contrast, the S&P 500 Utilities Index3 has advanced by 14.9%.

2022.02 Reaves Blog Revisiting Clean Energy Mania Chart 1
Most of the largest clean energy ETFs seeking to capitalize on the energy transition theme were launched in the 2005-08 time frame. Their investment returns have historically been highly volatile, and, on average, have generated negative total returns from 6/30/08 through 1/31/22. In contrast, the S&P 500 Utilities Index had an annualized return of 8.0% over the same period.

Renewable energy transition and the long runway of projects required to support it, the increasing adoption of electric vehicles and the possible demand growth associated with it, and additional capital spending on grid infrastructure to strengthen transmission systems promoting greater service reliability — these developments underpin the case for investing in utilities to gain exposure to the energy transition theme. 

In another previous blog, we made the case that utilities are leading the transition to renewable energy and should be considered as an impact investment. Many utility companies are directing large portions of their capital expenditures to solar, wind and other clean-energy generation projects. We expect that this will continue for many years given the expectations for renewables to represent more than 40% of total U.S. generation by 2050.4 These projects hold the potential to support future earnings and dividend growth and may provide appeal to investors seeking to capitalize on clean energy more conservatively.

Reaves Asset Management manages two funds which are concentrated in utilities stocks and are available to all investors: the actively managed Virtus Reaves Utilities ETF (NYSE Arca: UTES) and the Reaves Utility Income Fund (NYSE Amex: UTG), a closed-end fund. To learn more information about them and our firm please click on the links below.

Virtus Reaves Utilities ETF

Reaves Utility Income Fund

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Reaves Asset Management is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply any skill or training. Reaves is a privately held, independently owned “S” corporation organized under the laws of the State of Delaware.

The information provided in this blog does not constitute, and should not be construed as, investment advice or recommendations with respect to the securities and sectors listed. Investors should consider the investment objective, risks, charges and expenses of all investments carefully before investing. Any projections, outlooks or estimates contained herein are forward looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur.

1 Invesco Solar ETF (TAN): https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=TAN

2 The four other largest clean energy ETFs ranked by market capitalization are:

First Trust NASDAQ Clean Edge Green Energy Index FUND (QCLN): https://www.ftportfolios.com/retail/etf/etfsummary.aspx?Ticker=QCLN
iShares Global Clean Energy ETF (ICLN): https://www.ishares.com/us/products/239738/ishares-global-clean-energy-etf
ALPS Clean Energy ETF (ACES): https://www.alpsfunds.com/products/etf/ACES
Invesco WilderHill Clean Energy ETF (PBW): https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=PBW

3The S&P 500 Utilities Index is a capitalization-­weighted index containing electric and gas utility stocks (including multiutilities and independent power producers). Prior to July 1996, this index included telecommunications equities.

4Link to Source: U.S. Energy Information Administration, Annual Energy Outlook 2021, February 8, 2021

An exchange traded fund (ETF) is a type of security that tracks and index, sector, commodity, or other asset, but which can be purchased or sold on a stock exchange the way a regular stock can.
The value of an ETF may be more volatile than the underlying portfolio of securities it is designed to track. The costs to the fund of owning shares of an ETF may exceed the cost of investing directly in the underlying securities. 

Non-leveraged ETFs do not use borrowed funds in an attempt to enhance returns.

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Past results do not guarantee future performance. Further, the investment return and principal value of an investment will fluctuate; thus, investor’s equity, when liquidated, may be worth more or less than the original cost. This document provides only impersonal advice and/or statistical data and is not intended to meet objectives or suitability requirements of any specific individual or account.

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