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The clean-energy ETF sell-off may be a buying opportunity

Investors are turning away from clean-energy right now, but with oil prices rising, consumers may lead them back

Clean-energy exchange-traded funds have been swept up in the growth-stock sell-off of the past several weeks, but they may merit another look from investors, according to one analyst.

“These are solid long-term investments,” said Todd Rosenbluth, head of mutual fund and ETF research for CFRA.

In the year to date, the iShares Global Clean Energy ETF ICLN, -0.04% has lost 15%, and the Invesco Solar ETF TAN, -1.32% is down 11.4%. Some of the smaller funds have lost less, such as the 2.8% dip for the First Trust Nasdaq Clean Edge Green Energy Index Fund. QCLN, +0.51%

Source: FactSet

“The volatility of this year is probably in part from such a strong run in 2020,” Rosenbluth told MarketWatch. “Some profit-taking is natural. The valuations have gotten stretched, perhaps in particular for solar companies.”

Clean-energy funds began rallying in mid-2020 as it started to become clear that Democrat Joe Biden was favored to win the presidential election. Compared to 12 months ago, for example, ICLN is up 108% and TAN has gained 174%.

Flows into and out of some of the funds show a similar picture.

Source: FactSet

Source: FactSet

What’s more, some investors may now be viewing fossil fuel-based companies’ shares as better buys, CFRA analysts think. Over the past month, the SPDR S&P Oil & Gas Exploration & Production ETF XOP, +3.58% has shot up over 18%, and the Invesco Dynamic Energy Exploration & Production ETF PXE, +3.65% has gained 21%.

But investor focus may be better directed toward green energy in the longer run, Rosenbluth thinks. For one thing, the price of oil CL.1, 0.39% has surged over the past few weeks so at some point consumers may actively seek out alternatives that aren’t just cleaner but also perhaps cheaper.

“We are still long-term bullish for the overall trend toward clean energy,” he said. “Climate change is a priority for the Biden Administration and has been for the rest of the world for some time. That should be a positive for the stocks.” What’s more, with the COVID-19 relief package ready to be signed into law, all eyes will be on the new president’s longer-term legislative priorities, including infrastructure spending.

“Investors may consider moving to get in front of that,” Rosenbluth said. “These ETFs provide exposure to both energy and the infrastructure that goes with it.”

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