Renewable energy ETFs have continued their weak performance into 2024, making them the worst performers over the past year, according to recent data from Global X.
While inverse ETFs also made it into the fold, the Betashares Solar ETF (TANN), Global X Hydrogen ETF (HGEN), and VanEck Global Clean Energy ETF (CLNE) comprised the majority of the top five worst performers for the year ending 30 June, posting losses of 39.9 per cent, 29.5 per cent, and 27.8 per cent, respectively.
Despite this, Marc Jocum, Global X ETFs product and investment strategist, emphasised that renewable energy will remain a major theme, even as investor appetite shifts.
“There’s companies and nations that are pretty much targeting to get to net zero over the next couple of decades,” Jocum told InvestorDaily.
“But what’s really weighed down on it, no matter how great the structural theme might be towards renewable energy, is really some of the cyclical headwinds that these companies have had to face, mainly being driven down by higher interest rates.”
Jocum explained that higher interest rates and inflationary pressures continue to impact debt-reliant long-term renewable energy projects. While companies could borrow at very low rates just a few years ago, economic volatility has led to future profits being discounted at higher rates.
“Even though we still have a lot of belief that renewable energy is going to be a theme going forward, over the short term, higher interest rates and inflationary pressures have really hurt a lot of these companies,” he said.
“And not just that, but we’ve also seen more broadly that interest in ESG investing has actually hit its lowest popularity here in Australia,” Jocum said, noting that many investors are opting to become more targeted in their allocations.
Namely, Global X has observed a shift in investor allocations towards specific renewable energy areas, such as uranium and copper, and less so in some of the other sources, like solar, wind and broader clean energy in general.
This divergence – particularly for frontrunners like copper, which climbed as high as US$5.20 per pound in May – is likely driven by underlying demand fundamentals, driven by robust energy transition demand, according to JP Morgan Asset Management.
Weighing in on the outlook for copper, Marcella Chow, global market strategist at JP Morgan Asset Management, previously opined in May that EV and renewables, coupled with various additional applications including data centres to support the ongoing artificial intelligence (AI) development and EV charging stations, “suggest copper demand for broader network infrastructure will further accelerate in the next few years”.
“There’s quite a divide, but I think the reason that a lot of these renewable energy funds have underperformed is just a function of people reprioritising near-term profits over long-term profits, and that’s where a lot of these companies are getting hit harder than most,” Jocum said.
“If you actually look at some of the flows … a lot is coming out of the broader clean energy ETFs, and a lot more is going to these targeted approaches, because I think investors are kind of betting on certain renewable energy winners being more profitable.”
Examining the political dialogue in Australia, he highlighted uranium remains a hot topic, given Australia’s potential role as a global player.
Namely, the Liberal Party has indicated it has an appetite for nuclear energy, arguing it can “maximise the highest yield of energy per square metre and minimise environmental damage”.
While Australia has never had a nuclear power plant, it has 33 per cent of the world’s uranium deposits and is the world’s third largest producer of it.
For Jocum, the investment thematic of renewable energy is likely to continue in the years to come.
He said: “This year, the baton has kind of been handed on to artificial intelligence and technology, but we can definitely see a resurgence in a lot of these thematic products like renewable energy, because we have to get to net zero, and we’re not going to be able to do it via one way.
“There’s going to be multiple ways to get there, whether it’s through hydrogen, uranium, copper, wind, and I think investors are just placing their bets accordingly,” he said.
