Not All Cleantech ETFs Are Worth Investing In
Credit to Author: Michael Barnard| Date: Mon, 10 Feb 2020 17:45:47 +0000
Published on February 10th, 2020 | by Michael Barnard
February 10th, 2020 by Michael Barnard
As part of the gain in TSLA over the past few weeks, many people have taken profits out of the stock and are trying to decide what to do with them. Others are looking at the sector with fresh eyes and thinking that they should be getting into it. I’m one of the former and published my initial findings on cleantech and EV-oriented exchange traded funds (ETF) a few days ago, along with a request for additional information and insights.
And people responded. My initial list of funds has expanded to a more complete list of 15. And my assessment criteria have sharpened. Thanks to those who have reached out to me over the past week and provided insights and suggestions. There are clear winners and losers.
Image courtesy Washington State Dept of Financial Institutions
Obvious note: what follows is not professional investment guidance and does not constitute investment advice. As one commenter who suggested a fund said, #DontSueMe.
The funds in my current list are the following, and yes, the order is significant.
As part of my efforts to think through the space, I developed several different scoring approaches. The first was an unweighted scored index on the relative qualities of the funds for things that were important to me. These included the 1- and 5-year performance of the funds, calculated by me from raw ETF price points from sites such as Bloomberg, Yahoo Finance, and Google. I also value a more rather than less global perspective, so I scored that as well. And I like to keep more of the earnings rather than give more to the fund manager, so I scored that too. I like funds with more money to play with, so I put a score in for that as well, and also funds with more history, so newer funds scored more poorly.
As with anyone who has done this sort of exercise, I was dissatisfied with the results. The list ended up roughly in the order above, but not exactly. And that scoring approach gave positive scores to funds that would have lost me a lot of money if I’d invested in them five years ago. So I played with other combinations.
That resulted in the list in its order above, which is specifically sorted by what an investment of $10,000 five years ago (or at fund inception if less than five years ago) would be worth today after management fees, with best results first and worst results last. Let’s talk about this a bit more, breaking this down into winners, losers, and too-soon-to-tell categories.
The literal winners: The Invesco Cleantech™, ALPS Clean Energy, First Trust NASDAQ Clean Edge Green Energy, VanEck Vectors Low Carbon Energy, and Invesco Wilderhill Clean Energy funds all made the people invested in them good returns, over 40% on five years after annual management fees and similar returns in the past year.
Long-lasting funds: These five funds have been around a long time, with the exception of ALPS Clean Energy, which was incepted in 2018.
Big money funds: The funds with the best performance had the most dollars worth of assets under management. I had included that in my scoring, and it was interesting to see a correlation which supported my initial hypothesis. But let’s be clear, this is correlation, not causation.
Clean energy funds: The highest performers were over-represented with energy funds, not generic cleantech or transportation-oriented funds. Betting on wind and solar appears to be a strong return bet, unsurprisingly to CleanTechnica readers.
The literal losers: The bottom five ETFs (I won’t rename and reshame them) have both been around long enough to measure their performance, at least since 2018, and have all lost investors money over the 2-5 years in my assessment. This doesn’t necessarily mean that they are bad funds, as past performance is a terrible predictor of future performance, but there are other factors.
The Solactive Electric Vehicles and Future Mobility Index: Solactive is an indexing firm that builds indices for multiple categories for global clients. They’ve been doing it since 2007 when the firm started, just in time for the character-building years of the Great Recession, as their website notes. And three of the ETFs in the list — Autonomous & Electric Vehicles ETF (DRIV), iShares Self-Driving EV and Tech ETF | IDRV and KraneShares Electric Vehicles and Future Mobility ETF — specifically use their EV and mobility index as the base of the investment fund stock selection. Two of those actually lost money over the past five years, and the other would have made $64 if you had invested $10,000 into it, so not a good investment.
But is that Solactive’s fault? No, arguably. The index itself shows that the sector did just fine, with a return on its bundle of selected stocks of 82% over five years. Solactive’s appearance of being a stinky index is clearly related to the decisions of its clients who built ETFs on it and made a bunch of bad decisions separate from the index choices. A lot of that appears to be that the ETF vendors made decisions within the selection of indexed stocks and how much to put into each and made really bad decisions. Not enough into Tesla, and way too much in legacy automakers.
So don’t blame Solactive, and don’t assume their indices are bad. They have a client problem in this space, not an index problem.
Legacy automakers: The worst performing fund of all of them is First Trust NASDAQ Global Auto Index Fund (CARZ). It’s based on the NASDAQ OMX Global Auto Index, which is a market-capitalization weighted index, designed to track the performance of the largest and most liquid companies engaged in the manufacturing of automobiles. Basically it has all the biggies and it’s weighted to their market share. And they’ve sucked over the past five years, with the exception of Tesla. That’s the problem that underlies the appearance of Solactive being stinky. The poor performing ETFs all made bad decisions in leaning heavily into companies like BMW, with all of its idiotic choices over the past decade, all of which appear to be continuing.
Future transportation funds: There’s no easy way to put this, but people who were investing in funds devoted to future mobility did really poorly on their investments. There are seven transportation-specific funds in the list, and they are all in the bottom of the list by returns. Only one of the funds made investors any money at all, and it was the $64 I mentioned earlier. Once again, the Solactive index assessment shows that it’s not the space, it’s the fund managers. I have no idea why fund managers for this space are so apparently enamored of legacy automakers who are failing to perform when the space itself is doing so much better, but that seems to be the case.
Two transportation funds — iShares Self-Driving EV and Tech ETF | IDRV and Smart Transportation & Technology ETF (MOTO) — arguably get a pass. They both started in 2019, and the second of the two only started in November, so while they are in the bottom half of the list, it’s really too soon to tell how the fund will perform.
So what does this mean for my money? Well, if there were a Solactive-based fund that actually just matched the Solactive index, I’d probably buy it. But it’s obvious that the fund managers making decisions that start with Solactive are making poor decisions after that.
And funds based on third-party indices did very well and very poorly. Of the top seven performing funds, four were based solely on internal investment management decisions and didn’t start with third-party indices at all. With the Solactive evidence as well, it’s pretty clear to me that the investment management staff are the key ones to pay attention to, not whether the fund is based on a third-party index or not, something I found somewhat surprising.
I’ll be leaving my current TSLA investment alone, having skimmed a bunch of profits and still having more than my initial buy in. I don’t see a transportation-oriented fund that’s a winner here (BYD is disappointing too), so putting more money into the sector when I’m present in TSLA doesn’t appear to make much sense. I’ll be diversifying the TSLA profits (and some other rebalancing sell returns) into 2-3 of the top winners from this list, as I don’t see any reason why their returns shouldn’t continue. Their fundamentals are rock solid. Many thanks to commenter Hachilio who suggested the top performing fund, PZD – Invesco Cleantech.
Are there other takeaways worth pointing out? Funds I’ve missed? Alternative hypotheses for performance? Let me know in the comments or via email or other messaging.
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Michael Barnard is Chief Strategist with TFIE Strategy Inc. He works with startups, existing businesses and investors to identify opportunities for significant bottom line growth and cost takeout in our rapidly transforming world. He is editor of The Future is Electric, a Medium publication. He regularly publishes analyses of low-carbon technology and policy in sites including Newsweek, Slate, Forbes, Huffington Post, Quartz, CleanTechnica and RenewEconomy, and his work is regularly included in textbooks. Third-party articles on his analyses and interviews have been published in dozens of news sites globally and have reached #1 on Reddit Science. Much of his work originates on Quora.com, where Mike has been a Top Writer annually since 2012. He’s available for consulting engagements, speaking engagements and Board positions.