Clean Energy

Whether sparked by a weak core CPI report or just on oversold conditions, Friday’s broad rally helped take pressure off the energy stocks with the SPDR Select Energy Sector ETF (XLE) making a 3.25% gain on the day.  Despite that strong showing, the top ten ETFG Quant scoring ETFs are all still in the energy sector, but conspicuously absent are the “alternative energy” stocks that dominated in 2013 and early 2014.  While the largest of the clean energy alternatives, Guggenheim Solar (TAN) might only be down 3.87% in 2015 compared to 4.96% for XLE, other larger players in the sector such as PowerShares WilderHill Clean Energy Portfolio (PBW) and the Market Vectors Global Alternative Energy ETF (GEX) are still underperforming (down 7.59% and 5.65% respectively).  Even if energy stocks find their legs soon, could it be lights out for alternative energy?

One factor that may be working against a clean energy comeback is poor momentum as the ETFG technical scores for the most widely traded funds have plummeted to their lowest quartile.  Such relative weakness isn’t all that surprising considering their strong performance in 2013 and early 2014 as momentum darling TAN racked up a 2013 gain of 127.91% while the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) made 93.91% compared to 26.25% for XLE and the S&P 500’s TR 35.35%.  That strong momentum carried into early 2014 as both TAN and QCLN strongly outperformed the energy sector and broader market although much of those gains were first eaten up by profit taking before the September correction hit high momentum clean energy stocks hard.  Some alternative energy funds saw losses between September 9^th and the market low on October 15^th of 3x and 4x greater than the S&P 500.  With most alternative energy ETFs still trading significantly above their 2013 lows, it may be some time before investors feel confident that the selling pressure has abated.

If their performance history wasn’t a big enough stumbling block for clean energy ETFs on the road to glory in 2015, their portfolio composition might be.  Like many specialized funds in emerging technologies, alternative energy ETF’s are heavily concentrated with anywhere from 30 to 50 holdings being the norm, giving the funds more volatility and reduced diversification due to cross-holdings.  Large common holdings like SolarCity, First Solar, and SunEdison have weighed heavily on the alternative energy space as lower oil prices dampen analyst expectations for more expensive clean energy solutions.

Other funds including GEX and QCLN had large allocations to Tesla Motors, whose 13% lass in 2015 has heavily weighed down their performance.  And investors may have once praised alternative energy funds for investing in the manufacturers of clean energy technology as opposed to large utility allocations like former darling theme global infrastructure; but that utility orientation may have given them added lift in late 2014 and so far in 2015 as utilities and defensive names continue to dominate. 

But it’s not all cloud and rain in the sector, one clean energy ETF that has managed to avoid the pain inflicted in 2015 is the tiny iShares Global Clean Energy ETF (ICLN), down .41% in 2015.  With 30 holdings, ICLN is heavily concentrated like most clean energy ETFs, but a global focus beyond just solar or wind has given it staying power relative to its peers.  TAN currently has 27 positions with over 65% concentrated in the top 10 and a heavy concentration in underperforming American stocks with 44.45% of its portfolio tied up at home.  By contract, ICLN has approximately 28% of its allocation in U.S. equities which has helped it avoid some of the pain inflicted by SolarCity and First Solar.  Another aspect of ICLN’s global focus is the use of China H-shares while larger TAN has focused buying Chinese solar exposure with ADRs.  That more direct China exposure may have helped weighed down performance in 2013 when ICLN returned 49.1% to TAN’s 127.91%, but may help give it more lift in 2015.

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