AJ Bell comments on S&P Global Clean Energy Index revisions

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AJ Bell has issued a comment on the recent news that the S&P Global Clean Energy Index has been significantly revised, prompting changes in ETFs tracking this index. 

ETFs that have made changes include the USD5.5 billion iShares Global Clean Energy ETF, which has been a popular choice with ethical investors over the last year, AJ Bell says. The firm notes that after taking 12 years to raise its first USD1 billion, the European version of this ETF took just 12 weeks to raise its next USD1 billion. 

On balance the changes are positive, but have the potential to dilute exposure to the clean energy theme, the firm says, warning that S&P may make further changes to the index to include emerging market stocks and broaden the definition of clean energy businesses. 

The changes highlight the fact that thematic ETF investing requires a more active approach to fund selection, the firm says. Matt Brennan, head of passive portfolios at AJ Bell, comments: 

“The iShares Global Clean Energy ETF has been a hit with ethical investors over the last year, particularly in the wake of Joe Biden’s election as US President. Now the index tracked by the ETF has undergone significant changes, investors should make sure they’re happy to continue to hold the fund. On balance the changes are positive, adding diversification and allowing the ETF to grow further, though there is potential for exposure to the clean energy theme to be diluted. 

“There aren’t too many other options out there to back this theme without running a large portfolio of shares yourself, so investors are likely to accept the changes and remain invested. S&P are planning to consult on further changes later this year, which could mean emerging market shares are included in the index. They will also consider broadening out the clean energy theme to include businesses operating in areas such as marine energy and energy storage, amongst others. 

“These changes do serve to highlight how thematic ETF investing requires a more active approach than ‘set and forget’ plain vanilla index tracking strategies. Thematic ETF investors need to be alert for changes, and willing to roll up their sleeves and look under the bonnet of the ETFs they’re investing in.” 

The changes made on 19 April 2021, by S&P to its Global Clean Energy index, included expanding the number of constituents, lowering the criteria for inclusion, and changing the weighting methodology.  

This index is tracked by two iShares ETFs – one based in Europe and the other over in the US, with combined assets of over USD11 billion, representing one of the largest ‘thematic’ ETF strategies in the market. In addition, a BMO ETF was launched in January 2021 to track this index, based in Canada. 

“The European-based ETF launched in July 2007, making it one of the oldest thematic strategies around,” Brennan says. “It aimed to give exposure to the 30 largest global companies involved in the clean energy sector. Although the weighting methodology was complex – based on an exposure score to clean energy, and the size of the company, alongside liquidity – given the number of constituents and a maximum weighting cap of 4.5 per cent for an individual company, it had a bias towards smaller companies compared to an index weighted on size alone. Though the index did have liquidity requirements for underlying stocks, for the first 13 years, the European ETF’s assets remained below USD1 billion. 

“However, after taking 12 years to raise the first USD1 billion, it took just 12 weeks for it to raise the next USD1 billion. As the global climate agenda gained momentum in 2020, including the election of Joe Biden as US President in November, the strategy experienced continued growth, with assets peaking at USD6.5 billion in January 2021. 

“It’s not unprecedented for an ETF to lay dormant for several years, before rapidly growing as the asset class comes into favour (for example gold, income investing, inflation-protected bonds). However, in this case, given the concentrated nature of the product into smaller companies, this meant that the ETF was building up large stakes in the underlying companies. For instance, Renewable Energy Group was one of the 30 holdings in the ETF before the index reconstitution. According to a filing from Blackrock on 25 January 2021, the combined ownership of this company across various Blackrock products was approaching 19 per cent.”  

Brennan concludes: “As highlighted, S&P recently updated the index to include more companies, including those with a lower exposure to clean energy. This has the potential effect of diminishing its tie with the theme it is aiming to provide. On the other hand, the changes increase the potential investment capacity by a multiple of three. Looking at the recent filings from Blackrock, these changes have been enacted at the fund level. The number of stocks in the ETF has risen from 30, to 84. On balance, we feel the index changes are a positive, however, it does serve as a reminder for investors in ETFs to understand what you are buying, especially as the number of ETFs in the market expands.” 

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