Bloomberg Intelligence reports concentration risk in energy ETFs still a concern
The decreased concentration of stocks associated with the clean energy theme within ETFs provides investors with broader and less volatile exposure, writes Bloomberg Intelligence (BI). This also means that some more diversified ETFs such as BlackRock's iShares Clean Energy ETFs (ICLN and INRG) may have not benefited as much from the rebound of pure-player clean energy stocks since June, according to Bloomberg Intelligence (BI).
Still, warns BI, some companies like Sunworks still have close to 20 per cent of their shares held by the ETFs tracked by BI so drastic price swings can still be expected.
According to BI, clean-energy ETFs are less exposed to concentrated-holding and volatility risk since S&P's March-April index reconstruction diluted eight of the 10 most common positions. The S&P index doesn't allow for the addition or removal of names in its summer rebalance, but others that did added 16 unique companies to the clean-energy universe as defined by the 10 largest US-focused ETFs tracking the theme.
Of the 321 unique holdings, 26 are held in more than half the ETFs tracked by BI. On average, the 10 most popular holdings in those funds account for a 2.4 per cent weighting and 6.3 per cent of market capitalisation, down from 10 per cent in March.
Adeline Diab, Head of ESG and Thematic Investing EMEA at Bloomberg Intelligence, says: “Ownership of 20 clean-energy companies by the 10 biggest ETFs in the theme remains concentrated after the March-April rebalance, especially for prominent small-cap gainers in 2020. This magnifies the risk for those equities upon future ETF rebalancing, as some funds may be forced to pare holdings because of limitations on percentage ownership, heightening price volatility. Though 60 per cent of stocks in BI's clean-energy tracker have less than a 1 per cent market-cap exposure to ETFs, 42 companies still exceed 5 per cent.
“Nine of the 10 companies most held by ETFs are small caps worth less than USD1 billion - a group more vulnerable to volatility and a rebalance squeeze due to a lack of size or liquidity. Sunworks' share price rose 76x between April 2020 and January, notes BI, and the company was added to four ETFs.”
The stocks of often smaller, high-beta pure-play clean-energy companies with the biggest stakes held by ETFs have consistently exceeded peers in terms of 90-day volatility, notes BI, with prices falling further than broader-based peers during the March-April rebalancing season and recovering more sharply in June. The three-month performance swings for the stocks with the most concentrated ownership and heavier ETF involvement are mirrored by one-month returns, as policy momentum and energy and carbon prices offset supply-chain uncertainties.
According to BI, stocks with 10 per cent-plus of their market caps held by ETFs recovered by 14 per cent in June, but they have still fallen more deeply on a three-month basis compared with a decline of 10 per cent with 5-10 per cent ownership, zero for 1-5 per cent and a 6 per cent gain for those with less than 1 per cent of shares held by the funds.
Adeline Diab says: “We observe a significant difference in valuation multiples across the most-held clean-energy companies, ranging from 158x to 5.82x EV/Ebitda. While we could expect a market correction of the stocks with high valuation multiples, the reactions to green announcements and flows seem to impact all green stocks in an indiscriminate manner - moves that may be exacerbated by the common holdings across the top 10 clean energy ETFs. This trend may also be amplified as banks' structured products are increasingly linked to popular ETFs - leading to a compounding effect.
“While our BI Clean Energy ETF Tracker averages 21.5x EV/Ebitda, over half of the top 10 stocks' average of 55x, reinforcing our view that concentration carries risks that need to be considered to avoid swings that may not be driven by fundamentals.”