Renewable energy ETFs are making a comeback after a dismal showing in the first half of the year. And much of the gains have been fueled by an unlikely source – the rising tide of bullishness over artificial intelligence.
AI is poised to accelerate and propel the energy transition, being both a heavy consumer and facilitator of clean energy.
NAV Returns: Back in the Green
Renewable energy ETFs have ridden the AI hype train and have rallied on a total return basis. In fact, eight of the top 12 best-performing ETFs over the past month have been closely linked to the energy transition.
A pair of hydrogen-focused funds – the Global X Hydrogen ETF (HYDR) and the Defiance Next Gen H2 ETF (HDRO) – have risen more than 25% apiece. Both ETFs offer pureplay exposure to global companies involved in hydrogen production spanning multiple industries.
Beyond hydrogen, there’s also the ProShares S&P Kensho Cleantech ETF (CTEX) – which invests more broadly in companies developing green technologies, like solar, wind and geothermal – and the Invesco Solar ETF (TAN), the largest and most liquid solar ETF.
Also rallying double-digits is the ALPS Clean Energy ETF (ACES) – which focuses on North American companies at the forefront of the energy revolution. Top holdings include First Solar, Enphase Energy, Rivian and Tesla.
These ETFs have handily outperformed traditional oil and gas ETFs. They've also outperformed exploration and production ETFs over the same period. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP), for instance, is down 5% – falling in tandem with crude oil prices.
But the reversal comes after years of relative underperformance by clean energy. Historic production cuts and higher interest rates have hurt the growth trade. The result has been beaten-down stocks and depressed valuations.
Solar stocks have been on a tear lately after positive analyst upgrades over names like First Solar. Analysts cite a combination of demand for electricity stemming from AI data centers, along with U.S. protectionist policies aimed at keeping solar product consumption within domestic borders. China has similarly put several planned anti-price war measures in place to support its own solar companies.
Despite political backlash around ESG, the speed and intensity of renewable energy adoption continue unabated in Europe and Asia.
Powering the Age of AI
Data centers are increasingly powering the need for renewable electricity. Goldman Sachs Research expects AI to drive up data center power demand 160% by 2030.
And that’s just data centers alone. The operations themselves typically require enormous power to carry out. A single ChatGPT query requires roughly 10 times more watt-hours of electricity than a quick Google search, according to the International Energy Agency. Thus far, the increasing energy efficiency has kept pace with demand. But that will likely prove harder to accomplish going forward.
Additionally, tech titans Alphabet and Microsoft, which have been doubling down on their AI investments, have pledged to expedite advanced clean electricity technology and achieve 24/7 carbon-free energy by the year 2030.
Flows Leave Much to Be Desired
Despite the recent outperformance, flows have been anemic for virtually all clean energy ETFs. They were all the rage in 2020. However, they've since fallen out of favor amid global supply constraints, ESG politics, and backlash over so-called “greenwashing.”
Such alternative energy ETFs have seen little to no inflows this year. The lone exception has been First Trust Nasdaq Clean Edge Smart GRID Infrastructure Index (GRID) – which has seen more than $300 million in net inflows over the past four weeks, bringing its year-to-date haul to $440 million. GRID is up roughly 15% so far in 2024.
Still, a resurgence of interest in sustainable ETFs may not be too far off. Investors might be willing to reevaluate their clean energy exposure amid the AI frenzy, beaten-up valuations and interest rates likely peaking.
According to the latest Global ETF Survey conducted by Brown Brothers Harriman, a strong majority of ETF investors (74%) plan to increase their allocation to ESG ETFs over the next 12 months. Of the remaining 26%, nearly half of investors not planning to increase their exposure cite performance as their primary concern. But perhaps the most important reason (especially among U.S. investors) is a lack of consistent methodology and framework for “ESG” products.
Source: Brown Brothers Harriman
Several near-term factors could derail the recent runup in clean energy plays, but the long-term trajectory towards clean energy adoption appears solid. Prospective rate cuts and the AI boom could rekindle interest in sustainable investing.
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