ICLN: Increased Attractivity Fueled By Revised Benchmark Index Composition
Summary
- Benchmark index composition was updated in mid-April 2021.
- Revised index offers broader diversification.
- Significant exposure to hydrogen trend and "traditional" renewables at the same time.
The benchmark index of the iShares Global Clean Energy ETF (NASDAQ:ICLN) has changed its composition as of April 19, 2021. It now comprises a total of 83 positions (previously 31) and is more broadly diversified with 21 countries (previously 15). In my view, the ETF has thus become significantly more attractive for investors who are seeking to participate in the "green revolution".
On March 24, 2021, index provider S&P Dow Jones Indices announced, after consultation with market participants, that it would change the composition of the S&P Global Clean Energy Index, which is the benchmark for the ETF discussed here. "In order to further reduce constituent concentration, ease liquidity limitations, and improve index replication" the index composition was adjusted effective April 19, 2021.
So-called "green investments" are on everyone's lips, all the rage, so to speak. This seems only logical, given the general consensus on man-made climate change. One of the main pillars of the fight against climate change is the generation of emission-neutral energy. In the meantime, the prices of green shares have fallen back quite a bit from their peaks at the turn of the year 2020/21. The correction of the iShares Global Clean Energy amounts to roughly 30% as of April 30.
It should be clear that the future belongs to these companies in the medium to long term. The below chart illustrates the massive global transformation we have experienced over the last 20 years and especially in the last decade. Everything on renewables! As with all new technologies, the only question is which companies will prevail. Who has the highest resilience, the greatest adaptability, and the most distinctive innovative spirit? For me, ETFs are in principle the (currently) best possible answer to these questions. Unlike mature/more mature sectors, where winners have emerged over time and sector momentum generally wanes, the future competitive environment for emerging industries is difficult to predict.
Data source: International Renewable Energy Agency.
Ultimately, every investment is about probabilities. Namely, the probability that your investment case will materialize. Since my focus is on long-term asset accumulation, "protect the capital" is definitely an important criterion. Accordingly, I find investments in individual stocks in established sectors much more predictable and therefore more sensible than in "new" industries. With this in mind, I have a clear preference for ETFs as investment vehicles in the renewable energy sector to increase the likelihood of betting on tomorrow's winners.
So let's take a closer look at the iShares Global Clean Energy rebalance. The first thing to notice, as mentioned at the beginning, is that the number of positions has increased significantly from 31 to 83. The USA with now 24 companies (previously 9) and China with 9 companies (previously 3) are proportionally still the most represented countries. Completely new, however, are representatives from the following countries:
Italy
- Enel (OTCPK:ENLAY): The traditional Rome-based utility is more of a big tanker than a newcomer. Nevertheless: The company has presented an ambitious agenda for 2030, which focuses on decarbonization and increasing decentralization of energy supply. Renewable energy sources currently account for around 56% of installed capacity. By 2030, renewable energy capacities are to be tripled from around 50 GW today to around 150 GW. The global market share in terms of installed capacity would then be 4%+ (previously 2.5%). The phase-out of coal-fired power generation is supposed to be completed as early as 2027.
- ERG (OTC:ERGZF): This is also a utility. About 85% of its capacity (3.1 GW) is attributable to the renewable energy sources wind (63%), hydro (17%), and solar (5%).
- Falck Renewables: Based in Milan, the company has a total of 1.3 GW of installed capacity - making it relatively small compared to the other two Italian competitors. The Roadmap 2025 envisages a doubling of capacity, to which an expansion of the solar segment, in particular, is to contribute over proportionately.
United Kingdom
- SSE Renewables (OTCPK:SSEZF) operates approximately 4 GW in the UK and Ireland. This capacity is exclusively attributable to wind and hydro (2.5 GW and 1.5 GW, respectively). There is no activity in solar due to geography.
- Drax Group (OTCPK:DRXGF) operates a generation portfolio of sustainable biomass, hydro-electric, and pumped hydro storage assets in the UK. The company also operates a global bioenergy supply business with manufacturing facilities in the US and Canada, producing compressed wood pellets for its own use and for customers in Europe and Asia. In 2020, biomass accounted for 75% of energy generated, hydro for 2%, gas for 15%, and coal for 8%.
Chile
- Enel Americas (ENIA) belongs to Italy's Enel (mentioned above), which holds 65% of the shares. Most recently, the subsidiary acquired the parent's operations in Central and South America for about $6 billion. This transaction has increased the share of green capacity in the portfolio to 69% (based on 16.4 GW) from 55% previously (based on 11.3 GW). The bulk of the carbon-neutral operations are in Colombia, Brazil, and Peru. Countries where you always buy into some political and exchange rate risk.
Japan
- Renova is Japan's only publicly traded pure-play developer and independent power producer exclusively focused on renewable energy. The company has roughly 0.7 GW of assets in operations/under construction in solar PV and biomass.
Switzerland
- Meyer Burger (OTCPK:MYRBY) (MYBUF) formerly a supplier of production equipment for solar cells and modules, is preparing to position itself more above in the value chain and act as a producer of these products in the future - an interesting investment case. The focus is on rooftop installations in Europe, as the company believes this market offers more attractive growth prospects in the coming years. The Swiss company plans to expand its production capacities from currently 0.8 GW to 13.4 GW (modules and cells combined). In parallel, the company is working on entering the US market.
India
- Azure Power Global (AZRE) is owner of the second-largest solar energy portfolio in India (7.1 GW), whereof roughly 2.0 GW are currently operated while the remainder is under construction or committed (1.1 GW and 4.0 GW, respectively).
The inclusion of India, Italy, and Japan is of particular interest in view of the fact that these three markets are among the top 10 countries in terms of installed renewable energy capacity. India, in particular, is a very attractive market. The subcontinent showed the second-highest average growth rates in installed capacities after China in the period 2010 to 2020 as well as 2015 to 2020. The Indian government set a target of 450 GW of renewable energy capacity by 2030. For comparison, the country's total energy generation capacity today is about 380 GW, out of which 90 GW are of renewable energy, not including large hydropower stations (source: Economic Times).
The chart below illustrates the CAGR for renewable energy (hydro, wind, solar) in the global top 10 countries with the largest installed renewable energy capacities for the period between 2010 and 2020. In the fast lane are countries such as the US, Brazil, India, and Spain. In China, Canada, Germany, and Italy, the pace of expansion has slowed recently, as reflected in the lower growth rates in the second half of the period under review (i.e., 2015 to 2020).
Data source: International Renewable Energy Agency.
The iShares Global Clean Energy ETF covers by far not only those energy sources that may immediately come to mind when thinking of "renewables" such as solar, wind, and water. The ETF also offers attractive exposure to hydrogen. Three hydrogen pure-plays (plus Denmark's Orsted) from the Solactive Hydrogen Economy Index were already included in the ETF previously. With the new addition, five more pure-plays found their way into the ETF. This means that a total of nine out of 28 companies from the Hydrogen Economy Index are also in the ETF discussed here. The remaining 19 components of the Hydrogen Economy Index are often not pure-plays, but car manufacturers such as Toyota (TM) or Daimler (DDAIF). In total, the hydrogen pure-plays in the iShares Global Clean Energy have a weighting of 9.2% as of April 30, 2021.
Company | Country | Old Index Inclusion | New Index Inclusion |
Nel | Norway | No | Yes |
FuelCell Energy (FCEL) | USA | No | Yes |
Ballard Power (BLDP) | Canada | No | Yes |
McPhy (OTCPK:MPHYF) | France | No | Yes |
Bloom Energy (BE) | USA | No | Yes |
PowerCell Sweden (OTC:PCELF) | Sweden | Yes | Yes |
DOOSAN FUEL CELL (OTCPK:DOOSF) | Korea | Yes | Yes |
Plug Power (PLUG) | USA | Yes | Yes |
Orsted (no hydrogen pure-play) | Denmark | Yes | Yes |
Conclusion: It can be stated that the updated line-up enhances the attractivity of the iShares Global Clean Energy. On the one hand, the ETF is now significantly more diversified in terms of number of stocks but also regarding geography and sector coverage. On the other hand, the ETF now offers even more than before the opportunity to participate in the potential upside in the hydrogen sector. However, the latter also implies that any investment in a "pure" hydrogen ETF such as the L&G Hydrogen Economy should be checked in advance for potential overlaps with the iShares Global Clean Energy.
APPENDIX:
Countries below were already included in the old version of the benchmark index. However, the number of representatives was (partially) increased in the course of the update.
Country | Old Index (all included in new index) | Additions to New Index |
USA |
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Spain |
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Sweden |
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Portugal |
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Norway |
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Korea |
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Canada |
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Israel |
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France |
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Germany |
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Denmark |
| N/A |
China |
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Brazil |
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This article was written by
Analyst’s Disclosure: I am/we are long ICLN. 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.
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