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Clean energy will be a top theme in ETFs this year, market analysts say

Clean energy could be the ETF theme of the year.


That’s what two market analysts predict as the group builds on its gains since Election Day with the prospects of President-elect Joe Biden’s green infrastructure plan on the horizon.


The combination of supportive policy changes and technological advancements should continue to fuel the space, Anna Paglia, head of ETFs and indexed strategies at Invesco, told CNBC’s “ETF Edge” last week.


“Think about solar panels today that cost 80% less than they used to,” she said in an interview Monday. “This is where the growth of an industry’s going to come from.”


Businesses, consumers and regulators will be key to that growth, Jay Jacobs, head of research and strategy at Global X ETFs, said in the same “ETF Edge” interview.


So far, clean energy technology investments have done well with all three interest groups, said Jacobs, whose firm runs the Global X CleanTech ETF (CTEC).


“You do have Biden with a Democrat Senate behind him, which keeps him very focused on a $2 trillion infrastructure plan, which is inclusive of clean tech as well,” he said. “On the consumer side of things, you see more and more people installing solar panels, buying electric vehicles. Electric vehicle sales were up 70% in China this year alone. And if you look at the business environment, you’re seeing that a lot of what’s happening with ESG is not just about investing, it’s about changing how companies operate.”

As corporate America embraces the idea of abiding by ESG — environmental, social and governance — metrics, it’s only contributing more to clean energy’s overall growth, Jacobs said.


Companies are “thinking about themselves as members of society. How do they impact the environment? How do they impact their customers? How do they impact their employees?” he said. “When you have this rise of interest in something like climate change or various social issues, you see companies really putting dollars behind that as well. So, I think it’s not just a regulatory change. I think it’s the confluence of multiple different stakeholders that are pushing clean tech forward right now.”


Invesco’s Paglia said two developments would push the regulatory conversation forward.


“The SEC is really focused on disclosure, truth in advertisement. It is not enough to say that you are ESG, especially when E, S and G mean so many different things for so many different sponsors,” she said. “We want to make sure that companies that portray themselves to be ESG compliant somehow show what it means for them and disclose that.”


The other key will be putting pressure on companies to deliver on certain social and sustainability goals, she said.


“Data shows that certain behavior associated with ESG is actually helping companies deliver better performance,” Paglia said. “Pushing for better diversity, whether it is gender diversity or any other type of diversity, is healthy. I don’t think that the SEC is trying to change behavior, but it’s certainly putting pressure on companies to come clean and disclose their policies. Now, that in turn may result in changes in behavior, which I think overall are healthy for the industry.”


“And right now, we have seen that by focusing on ESG, you don’t have to choose between performance and socially responsible investing because ESG strategies have delivered very good results over the last few years,” she added.


Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, said in the same “ETF Edge” interview that it’s important for investors to look “under the hood” when buying ESG or clean energy ETFs.


He noted that Invesco’s WilderHill Clean Energy ETF (PBW) is about 39% industrials and 6% utilities, while the iShares Global Clean Energy ETF (ICLN) has over half of its assets in the utility sector.


“These ETFs are not going to all perform the same. Even if you get the theme right, you’ve got to make sure you understand what’s inside the portfolio,” Rosenbluth said.


“The one thing I will say is the ETF industry does a great job of spotting that theme and then having multiple products that have come into the marketplace,” he said. “We now have three work-from-home-related ETFs that are directly tied to it and then sub-themes like cloud computing from Global X and cybersecurity products from First Trust and others. So, I don’t know what that theme is going to be that comes from under the radar, but I’m confident the ETF industry is going to gravitate towards it relatively quickly.”


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