Last summer I began monitoring various sector ETFs -- looking for trends. To my surprise, when checking recently, I noticed that the iShares Global Clean Energy ETF (ICLN) outperformed all the other ETFs I was monitoring.
Since ETFs often show sector trends, I decided to dig a little deeper and look at long, medium, and short-term trends in the energy sector.
Another surprise. Though I was aware that fossil fuel equities had not done well recently, I didn't realize how poorly they have performed.
Energy ETFs of all stripes have performed poorly over the last 7 years
All major energy ETFs, both fossil fuel and renewables, have done poorly over the last 6-7 years -- a period in which SPDR S&P 500 ETF (SPY) was up almost 100%
Whether it's the oil majors, newly minted frackers, MLPs, or renewables, all have done dismally. Looking just at the energy stocks, ICLN has done the best - though nowhere near as well as SPY. It's been a bum ride for all energy investors.
Even Dividend Aristocrat Exxon Mobil (XOM) has lost over 30% of its value in the last 5 years.
Dividends have moderated the underperformance but the loss is still significant.
Over the last year, though, renewable energy has bested fossil fuels
Looking just at the most recent year ETF price action we see that, excepting Invesco Solar ETF (TAN), the renewable ETFs have outperformed Energy Select Sector SPDR ETF (XLE) and though still lagging, have closed the gap on SPY's performance.
In the last 3 months - a period of sharp market and oil price corrections - renewables have trounced both fossil fuels and the S&P 500
Now normally, I wouldn't put much stock in 3-month performances -- it's too short a time frame. But since we have had a major market correction --including sharply falling oil prices -- in the last 3 months let's see how the energy ETFs have fared during this volatile period.
A big surprise: The renewable ETFs, even TAN, have strongly outperformed both XLE and SPY. The applicable percentages are XLE down 24%, SPY down 15.4% while ICLN and VanEck Vectors Global Alt Energy ETF (GEX), only fell 4.2% and 7.6% respectively. This is somewhat unexpected as one might think that falling fossil fuel prices would make renewables less competitive.
Will these trends continue into 2019 and beyond?
Yes, things have been bad for fossil fuels, but are prices now bottoming? Will trends reverse in 2019? Apart from a major Middle East convulsion, I don't see it. Here's why.
It's simple: plentiful supply and falling demand. Both the U.S. and Russia are now pumping out record amounts of crude and associated natural gas -- rivaling Saudi Arabia. So much so that OPEC is beginning to lose control over the oil markets.
Technology has brought about fracking improvements which in the last few years have made it economical to extract vast amounts of oil and gas from U.S. fields such as the Permian and the Marcellus Shale. (It now appears the Permian rivals some of Saudi Arabia's largest oil fields.)
But, paradoxically at the same time, technology also is reducing the demand for fossil fuels, at least in the developed nations. The EV revolution alone threatens the oil markets -- 60% of crude is refined into gasoline and diesel fuel. This will develop into a nightmare for all oil producers. Then there is LED lighting, microgrids, power storage, and don't forget those increasingly cost-competitive renewables. It all decreases the demand for fossil fuel.
It's not only technology. Climate change concerns also weigh heavily on the oil and gas industry. Divestment from oil and gas companies now tops $8 trillion. In the courts, legal challenges are mounting as municipalities, states, and even children (who will have to live with the effects of climate change) seek relief. The litigation is likely just starting and could really snowball if ocean levels continue to rise -- which looks likely.
No, the huge existing global fossil fuel infrastructure (internal combustion vehicles, power plants, transmission lines, etc.) won't go away any time soon -- we are just too dependent on it. But a perfect storm is brewing and the future is very uncertain.
Three renewable choices which careful investors may wish to consider
Below I briefly note three renewable investment choices for conservative investors to consider. Investors must do their own due diligence before investing in this volatile sector.
ICLN, as noted above, is a renewable energy ETF. It's the largest (by market-cap) ETF in the sector. The ETFs holdings are international and weighed toward wind generation facilities. You can read my recent article on ICLN here.
SolarEdge Technologies (SEDG) is perhaps the most speculative of the three. The company makes equipment for the solar industry, is established, and has done well over the long-term. You can read my recent article on SEDG here.
The trends are clear. The fossil fuel industry is in a slow decline while renewables, bolstered by technology and climate change fears, are slowly but inexorably taking their place. Investors should be aware of these trends.
Disclaimer: I am not an investment advisor and this is an informational article only. All investors considering ETFs and equities mentioned must do their own due diligence.
Disclosure: I am/we are long ICLN, NEE, SEDG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.