In my eToro portfolio, I focus on long-term investments that combine performance and sustainability. One of the key assets I have selected is the iShares Global Clean Energy ETF (ICLN). This ETF is an excellent choice for exposure to the clean energy sector, a crucial area for the future. However, like any investment, it has both advantages and disadvantages. Below, I share my personal analysis of the positive and negative aspects of the ICLN.
The Good
Exposure to Clean Energy
The iShares Global Clean Energy ETF (ICLN) offers a direct investment opportunity in a sector with enormous long-term growth potential. The growing global demand for sustainable energies drives this trend, and the ICLN effectively captures this dynamic. Additionally, the fund provides exposure to companies that produce solar, wind, and other renewable energy sources, allowing investors to benefit from the increasing adoption of clean technologies.
The ICLN provides access to a variety of leading companies in the clean energy sector, each with a strong reputation and a fundamental role in the global energy transition. Some of the fund’s main investments include:
- Enphase Energy Inc. (United States): Leader in solar microinverter technology, recognized for its innovation in optimizing solar energy systems for homes and businesses. Weight in the ETF: 8.10%
- First Solar Inc. (United States): Manufacturer of high-tech solar panels, known for its focus on sustainability and cost-effective production of large-scale solar energy. Weight in the ETF: 7.65%
- Consolidated Edison Inc. (United States): One of the oldest and most respected energy providers in the United States, committed to transitioning to cleaner energy sources. Weight in the ETF: 6.41%
- Iberdrola SA (Spain): Pioneer in renewable energy, especially in wind energy production, with a long track record in the energy industry. Weight in the ETF: 6.23%
- Vestas Wind Systems (Denmark): Global leader in wind turbine manufacturing and development, with a presence in over 80 countries. Weight in the ETF: 5.53%
- China Yangtze Power Co. Ltd. (China): Operator of the world’s largest hydroelectric plant, the Three Gorges Dam, and a key player in hydroelectric power generation. Weight in the ETF: 4.05%
- EDP Renováveis SA (Portugal): Exclusively dedicated to renewable energy generation, mainly wind and solar, being one of the largest clean energy producers worldwide. Weight in the ETF: 3.99%
- Suzlon Energy Ltd. (India): Global provider of integrated wind energy solutions, focused on the design, development, and manufacturing of wind turbines. Weight in the ETF: 3.61%
- Chubu Electric Power Co. Inc. (Japan): Company with a long history in electricity generation, diversifying into renewable energy sources such as hydro and solar. Weight in the ETF: 3.56%
- Orsted A/S (Denmark): Formerly known as DONG Energy, it has successfully transitioned from fossil energy to renewable energy, and is now one of the largest offshore wind farm operators. Weight in the ETF: 3.48%
Global Diversification
One of the main attractions of the ICLN is its global diversification. This ETF invests in clean energy companies from around the world, helping to mitigate geographical risks. With a portfolio comprising over 120 positions, it offers access to clean energy stocks from various countries, thus balancing risk and enhancing growth opportunities in this sector.
Growth Potential
The companies in this ETF are positioned to capitalize on the transition to cleaner energy sources, a trend I consider fundamental in my investment strategy. With net assets of USD 2,172,436,157 as of August 19, 2024, this ETF has captured the interest of many investors, highlighting its relevance in the market.
ESG Focus
The ESG approach evaluates three key factors in investment: Environmental, Social, and Governance. These factors allow for the assessment of the sustainability and ethical impact of a company or fund.
In environmental terms, it analyzes how a company manages its natural resources, its impact on climate change, and its waste management practices. The social aspect considers the treatment of employees, customers, and communities, including factors such as working conditions and diversity. Governance evaluates the transparency and management practices of the company, including business ethics and shareholder rights protection.
The ICLN has an MSCI ESG rating of AA and an ESG quality score of 7.35, which reinforces its commitment to sustainability. This rating indicates that the fund has been positively evaluated in these three key aspects, aligning with the values of investors who seek not only financial returns but also a positive impact on society and the environment.
Low Operating Cost
With an expense ratio of 0.41%, this ETF is cost-effective and allows me to maximize net returns within my portfolio. This low fee is competitive, considering the global access it provides to a sector as specific as clean energy.
The Bad
Concentration Risk
Although the ICLN is globally diversified, it has a high concentration in specific sectors like utilities and technology, which can increase volatility under certain market conditions. This concentration in sectors such as Renewable Electricity (27.63%) and Electric Utilities (25.13%) could be challenging during periods of instability in these sectors.
Dependence on Government Subsidies
Many companies in this ETF rely on favorable government policies. A change in these policies could negatively affect the ETF’s performance. This is particularly relevant for companies operating in emerging markets or in countries where energy policies are unstable.
Market Volatility and Risk
Clean energy stocks can be volatile due to fluctuations in energy prices and international political events. With a standard deviation of 30.31% over 3 years, volatility is an important factor to consider when managing my portfolio.
Emerging Market Risks
Some of the companies the ICLN invests in are in emerging markets, which introduces additional risks such as political instability and currency risks. This ETF includes investments in companies from countries with less established regulatory frameworks, which can increase uncertainty.
Tracking Error Risk
There is a possibility that the ETF may not precisely track the underlying index, which could affect the expected performance. Although the ETF seeks to replicate the S&P Global Clean Energy Index, differences in methodology and market fluctuations may cause a tracking error.
Overall Assessment
Based on this analysis for the iShares Global Clean Energy ETF (ICLN), I consider the following aspects to assign an overall score as a long-term investment:
- Growth Potential: The clean energy sector is expanding, driven by global demand and efforts to mitigate climate change. The companies included in the ICLN are well-positioned to capitalize on this trend. Score: 9/10
- Diversification: Although the ETF offers geographic diversification and exposure to various sub-industries within the clean energy sector, it has a high concentration in certain specific sectors, such as utilities and technology, which can increase volatility in adverse market conditions. Score: 7/10
- ESG Focus: The strong ESG focus of the ICLN, supported by an MSCI ESG rating of AA, is a very positive point for investors concerned about sustainability, aligning ethical values with investment goals. Score: 9/10
- Market Risk: The inherent volatility of the clean energy sector, combined with dependence on government subsidies and exposure to emerging markets, introduces risks that must be carefully managed in a diversified portfolio. Score: 6/10
- Operating Cost: With an expense ratio of 0.41%, the ETF has a competitive cost, which is favorable for maximizing net returns in the long term. Score: 8/10
Overall Score: 7.8/10
The iShares Global Clean Energy ETF (ICLN) is an attractive long-term investment for those interested in the clean energy sector and committed to ESG principles. However, investors should be prepared to face market volatility and consider how this ETF fits into a broader, diversified investment strategy.
References
- BlackRock. (2024). iShares Global Clean Energy ETF. https://www.blackrock.com/cl/productos/239738/ishares-global-clean-energy-etf
- BlackRock. (2024). Prospectus: iShares Global Clean Energy ETF. https://www.ishares.com/us/library/stream-document?stream=reg&product=IUS-ICLN-J&shareClass=NA&documentId=2022295~2022297~1709212~1896830~1941397&iframeUrlOverride=%2Fus%2Fliterature%2Fprospectus%2Fp-ishares-global-clean-energy-etf-4-30.pdf
