Clean energy exchange-traded funds (ETFs) are expected to have a wider range of investment opportunities thanks to the change in the composition of the index they track.
This is likely to have the most immediate impact on the iShares Global Clean Energy UCITS ETF (LON:INRG), listed in the UK, and iShares Global Clean Energy ETF (NASDAQ:ICLN), listed in the US, according to Goldman Sachs.
Valued at US$5.6bn and US$5.8bn respectively, they are now giants of the world of clean energy; however, as Goldman pointed out, both were ‘sub-US$1bn’ a year ago.
The two will be monitoring closely changes to the S&P Global Clean Energy Index.
It was originally designed to track the performance of 30 companies from around the world involved in “clean energy-related businesses”.
Goldman pointed out that many of the companies tracked by the index were at the smaller, less liquid end of the market (smaller and less liquid in Goldman speak still values these businesses in the billions).
S&P plans to expand the make-up of its benchmark to 67, including those with “significant” and “moderate” clean energy exposure, rather than it being the primary business. In the UK, coal power station turned biofuel burner Drax Group PLC (LON:DRX) is the only addition.
These will become effective on April 19.
Goldman pointed out that since their January peaks, most of what it calls the ‘green energy majors’ have fallen around 20%, hit by rising inflation expectations, which then triggered interest rate concerns.
“We see current levels as a compelling entry point, especially in light of a 30-year super-cycle in clean energy spending and the average 35% upside to our base case SOTPs [sum-of-the-parts valuations], which value growth to 2035 at IRRs [internal rates of return] well below those seen in recent auctions,” said Goldman in a note to clients.
With this in mind, eyes will be on the main ETFs tracking the sector, which, unsurprisingly, have come off the boil too in the last six weeks with ICLN and INRG off 25% and 27% respectively.