What’s Fueling the Rise in Green Energy ETFs?
Green and renewable energy ETFs have performed exceptionally well so far this year, with the majority of outperformance coming after May. At a base case level, we believe that investor sentiment toward this investment theme may be reflecting the shifting outlook (a Biden win) for the upcoming U.S. elections, which could have a significant impact on the industry. Beyond November’s election results, we expect the U.S.—along with other countries—to enact sizeable fiscal stimulus that targets green energy projects. Over the long-term, we believe favorable changes in public opinion and economic fundamentals are likely to benefit the industry, as costs relative to traditional energy sources have declined dramatically. In our view, these developments may help fuel robust performance for the green and renewable energy theme in the years ahead.
Political Tailwinds for Green Energy?
During the first five months of 2020, three First Trust ETFs focused on green and renewable energy—the First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN), the First Trust Global Wind Energy ETF (FAN), and the First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (GRID)—performed relatively well compared to the S&P 500 Index (Chart 1). However, relative performance for these ETFs accelerated from June through September.
In our view, one factor that may help to explain the outperformance of these ETFs since May is the improving odds that Joe Biden could win the U.S. presidential election. While President Trump led in the Real Clear Politics (RCP) average betting odds at the end of May, odds had moved decisively in Biden’s favor by the end of June (Chart 2). Biden supports reducing U.S. emissions through substantial investments in green initiatives, outlined in a $2 trillion climate plan unveiled earlier this summer. While performance of green and renewable energy ETFs may be driven by election expectations in the near-term, we believe two important factors may drive long-term growth for this theme: public-sector investments— accelerated by COVID-19 stimulus—and improving affordability.