Menu Close

First Trust Global Wind Energy ETF: Tracing The Winds Of Change

Summary
  • Ongoing policy-related support and cost competitiveness has been instrumental in positioning wind energy as a compelling cost alternative to fossil fuels.
  • Yet still, conditions for sustainable use in key regions remain questionable.
  • FAN is not particularly well-diversified and its dividend record is mixed but it is one of the more efficient options in the renewable energy space and cheaper than solar.

The answer, my friend, is blowin’ in the wind. – Bob Dylan

Key features and performance

Over the years, governments and policymakers the world over have been looking to help engender a shift away from fossil fuels to more greener initiatives. Understandably, certain investors have been looking to capitalize on this gradual shift to a more carbon-neutral world. If you’d like to be a part of this cohort and would like a dose of renewable energy in your portfolio, you may consider the First Trust Global Wind Energy ETF (FAN). What makes this different from other renewable energy ETFs is that it is more oriented towards the wind energy segment. About 60% of the total holdings in this ETF are oriented towards core wind energy-related stocks. For a company to qualify for this ETF, it needs to be actively engaged in some aspect of the wind energy industry.

 

Despite major COVID-19 global supply chain-related disruptions to the wind energy segment for much of 2020, this ETF has fared relatively well on a YTD basis, outperforming the major traditional energy ETFs – the Energy Select Sector SPDR ETF (XLE), the iShares Global Energy ETF (IXC), and the S&P 500. Admittedly, it has been able to keep pace with its solar energy counterpart – the Invesco Solar ETF (TAN) that is up 122% YTD, but I would be rather wary of further upside there, as TAN currently trades at an elevated forecasted P/E of 37x vs. a more reasonable forecasted P/E multiple of 22x for FAN.

 

By general ETF expense ratio standards, an investment in the renewable/clean energy ETF universe doesn’t come cheap as most of the ETFs here trade at an expense ratio ranging from 0.6- 0.75%. However, within this renewable energy spectrum, FAN’s expense ratio of 0.62% makes it one of the more efficient options.

Dividends

From a dividend angle, the ETF offers you a 1.49% yield on a trailing basis (other peers in this space currently offer yields between 0.13%-2.5%), and on a forecasted basis (based on YCharts estimates), you’re poised to receive a decent 2.4%. That said, their dividend track record in 2020 doesn’t make for pleasant reading, and we may likely see a continuation of this. In Q1, Q2, and Q3 of 2020, dividends had been cut by 56%, 9%, and 40% respectively. In 2019, the Q4 dividend was the highest of the 4 quarters, so given this high base effect and considering the trend so far, there’s a good chance the upcoming dividend gets cut as well.

Holdings

An investment in FAN will give you access to 57 stocks. Looking at the texture of the holdings, I can see that in addition to wind energy stocks, there is also a tilt towards electric utilities. Those who subscribe to The Lead-Lag Report will note the importance I attach to the relative performance of the utilities sector (due to its bond-like characteristics) in determining risk-on/risk-off conditions in the market. As I’ve noted in The Lead-Lag Report the other day, utilities have demonstrated steady leadership in the recent past.

 

 

Another feature of this ETF is that it is not particularly well-diversified with an r-square of 65 (Source: Yahoo Finance) and the top 10 making up for 53% of the total holdings. I’ve also noted that in the top 10, you also have a lot of Canadian- based companies. The government there has been very supportive of the renewable energy industry and earlier this month announced a $7.5bn infrastructure plan primarily focused on pushing renewable energy initiatives.

Source: Seeking Alpha, Company Filings

 

The case for wind energy

Over the last two decades, power generating capacity on account of increased wind turbine installations has grown by 21% CAGR, and as you can see from the chart below, this rise in growth has become steeper over the last decade. According to the IEA, in the “onshore” wind energy space, capacity additions last year grew by 20% annually, driven mainly by additions in China and Europe. In fact, you’d also be interested to know that last year, for the first time ever, global additions in solar and wind capacity exceeded the traditional energy segments – gas and coal. Last year, total additions in solar and wind accounted for 45% of new capacity, up from less than 25% back in 2010.

 

Source: TPIC

 

Two broad drivers are pushing this tilt towards renewables such as wind energy. One is the long-term desire on the part of global policymakers to reduce the carbon footprint in the world, and two, on account of technological developments over the years, you also have the competitiveness of wind and solar energy as more compelling cost alternatives relative to fossil fuels.

 

I’ve been enthused by some of the recent policy-related tailwinds in key regions such as Europe and China supporting the ongoing penetration of clean energy. Europe recently finalized new climate rules targeting an increase in the share of renewable energy to 32% by 2030 whilst last month, China said that they would aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060. (Incidentally, China is already poised to hit a grid-connected wind capacity of 210GW by the end of this year.)

Regulatory support has been going on for a while but what has really triggered a recent shift to renewables is the cost factor. As you can see from the chart below, the Levelized cost of energy (LOCE) per MWh on an unsubsidized basis for onshore wind energy has dropped by 11% CAGR over the past decade, to lows of $28 (in fact, more recent research from Lazard believes that the global LOCE may have even dropped to as low as $26/MWh). This is certainly a more compelling value proposition than what gas, geothermal or coal can offer.

 

Source: TPIC

 

Source: Bloomberg

 

The expectation is that in 5 years, it will be more expensive to operate an existing coal or natural gas power plant than to build wind farms. Even government agencies have been highlighting the rapid shift in cost benefits. Recently, in the Lead-Lag Report, I had highlighted the UK government’s reduced forecasts for wind energy costs, which had been slashed by 47% from its 2016 estimates (estimated costs for gas and nuclear tech have been more stable). This evidently goes to highlight the rapid pace at which technological advancements have caught a lot of people off-guard.

 

If you’ve been following my writings across Seeking Alpha and in The Lead-Lag Report all through this year, you’ll note that I’ve been prophesying the likelihood of various governments the world over resorting to infrastructure-related stimulus to help bring their economies out of the rut. Given the environmental benefits and compelling cost benefits of this technology, I also expect these stimulus-related infra packages to show greater impetus towards renewable energy projects such as wind energy (see Canada’s recently announced infrastructure plan).

 

The shift won’t be plain sailing and will require patience

Having said all this, it’s also important to not get too carried away as this shift from fossil fuels to renewables will take time, and not happen overnight. Besides the COVID-19-related disruptions have prompted the IEA to slash its wind growth forecasts by 12% YoY for 2020. The IEA expects growth to bounce back in 2021 as the disruptions this year are mainly on account of delays rather than cancellations, but yet still, its combined expected onshore wind growth forecast for 2020 and 2021 is lower than their October 2019 forecast by c.9%.

 

Longer term as well, you also have to consider that conditions for wind energy are still not optimal, with plenty of capacity utilization problems, and with the manufacturing supply chain being concentrated in specific regions such as China and India (leading to delays in procurement and project delays). As mentioned recently in The Lead-Lag Report, currently, the wind potential in some of the densely populated regions in the world are not sufficient enough, leading to questions of whether a majority shift may even take place.

 

 

Recent reports also highlight that China, a major energy market, has not shown a great deal of alacrity to shift away from coal as it wants to avoid power failures (something that was rampant to a great extent in 2011), become more self-sufficient in energy security, and also protect its economic growth.

Conclusion

I like the ongoing policy-related support and the cost-competitiveness of wind energy and expect this to become a key theme going forward. That said, the shift away from fossil fuels may not be as plain sailing as many people think it will be, and it would be wise to rein in some of the enthusiasm as there are likely to be a few stumbling blocks along the way. Investors looking for a renewable energy-flavored ETF may consider FAN which focuses on wind energy. By general ETF standards, it is not cheap and the dividend record is patchy but relative to other renewable energy peers, it fares well on this front. It is also much cheaper than its solar energy peers.

 

View: Source

View: More news

Related Posts

30 Comments

  1. 0mniartist

    After looking at a number of the articles on your site, I seriously like your way of writing a blog.
    I book-marked it to my bookmark site list and will be checking
    back soon. Please check out my website as well
    and let me know what you think. asmr 0mniartist

  2. http://bit.ly/3gd1bLg

    I am really impressed with your writing skills and also with the layout on your blog.
    Is this a paid theme or did you modify it yourself?

    Either way keep up the excellent quality writing, it is rare to see a great blog like this
    one these days. asmr 0mniartist

  3. the asmr

    Wow, awesome weblog format! How lengthy have you been blogging for?
    you made running a blog glance easy. The whole glance of your site is fantastic, as well as the content!

  4. in asmr

    Attractive component to content. I simply stumbled upon your blog and in accession capital to
    claim that I get in fact loved account your weblog posts.
    Any way I will be subscribing to your augment or even I achievement you get entry to consistently quickly.

  5. gamefly off

    What’s Happening i’m new to this, I stumbled upon this I’ve discovered It absolutely useful
    and it has helped me out loads. I hope to give a contribution & aid different customers like
    its helped me. Good job.

  6. off asmr

    Excellent way of describing, and pleasant paragraph to get
    facts about my presentation topic, which i am going to present
    in school.

  7. http://bitly.com/3trMl6L

    I have been surfing online more than 2 hours today, yet I never found any interesting article like yours.
    It is pretty worth enough for me. In my opinion, if all website owners and bloggers made good content as you did, the net will be much more useful than ever before.

  8. asmr their

    What’s up it’s me, I am also visiting this web site on a regular basis, this web page is in fact good and the visitors are in fact sharing good thoughts.

  9. your asmr

    Thanks for ones marvelous posting! I seriously enjoyed reading it,
    you can be a great author. I will ensure that I bookmark your blog
    and definitely will come back someday. I want to encourage that you
    continue your great posts, have a nice afternoon!

  10. http://bitly.com/3buqqWd

    scoliosis
    When I originally commented I clicked the “Notify me when new comments are added” checkbox and now each
    time a comment is added I get three e-mails with
    the same comment. Is there any way you can remove me
    from that service? Thanks! scoliosis

  11. bit.ly

    scoliosis
    Hi there! This post couldn’t be written any better!
    Reading through this post reminds me of my old room mate!
    He always kept chatting about this. I will forward this
    write-up to him. Pretty sure he will have a good read.
    Thanks for sharing! scoliosis

  12. https://6869milesoflove.tumblr.com/

    dating sites
    I really like your blog.. very nice colors & theme. Did you
    design this website yourself or did you hire
    someone to do it for you? Plz answer back as I’m
    looking to design my own blog and would like to know where u
    got this from. many thanks free dating sites

  13. that asmr

    I simply could not go away your website prior to suggesting that I actually loved the usual information an individual provide on your visitors?
    Is gonna be again continuously in order to check up on new posts

  14. is dating sites

    I’m impressed, I must say. Seldom do I encounter a blog that’s equally
    educative and entertaining, and let me tell you, you have hit
    the nail on the head. The issue is something too few people are speaking intelligently about.
    Now i’m very happy that I stumbled across this
    during my hunt for something relating to this.

  15. dating sites and

    Hello There. I found your blog using msn. This is
    an extremely well written article. I will make sure to
    bookmark it and return to read more of your useful information. Thanks for
    the post. I’ll certainly return.

  16. our scoliosis surgery

    I believe everything posted was very reasonable. But, consider this,
    suppose you composed a catchier title? I am not saying your content is
    not good., but suppose you added a title to maybe grab folk’s attention? I mean First Trust
    Global Wind Energy ETF: Tracing The Winds Of Change | EcologyFunds.com is
    kinda vanilla. You should look at Yahoo’s home
    page and see how they create news headlines to get viewers
    interested. You might add a related video or a picture or two to get readers excited about everything’ve got
    to say. In my opinion, it would make your blog a little livelier.

  17. surgery scoliosis our

    Hey there just wanted to give you a quick heads up.

    The words in your post seem to be running off the screen in Safari.

    I’m not sure if this is a formatting issue or something to do with web browser compatibility but I thought I’d post to let you know.

    The design look great though! Hope you get the problem fixed soon. Thanks

  18. that free dating sites

    Pretty nice post. I just stumbled upon your weblog
    and wanted to say that I’ve really enjoyed browsing your weblog posts.
    In any case I will be subscribing for your rss feed and
    I’m hoping you write once more soon!

  19. http://tinyurl.com/

    Very nice post. I just stumbled upon your blog and wanted to say that I have truly enjoyed surfing around your blog posts.
    In any case I will be subscribing to your feed and I hope
    you write again very soon!

Leave a Reply

Your email address will not be published.