This ETF fell 36% last year. Has the renewable energy stock run out of power?

It should have been a great year for clean energy, but it wasn’t. I’m looking at how this renewable energy exchange traded fund could perform this year.

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Key Points

  • 2021 was not a good year for most renewable energy stocks
  • Rising oil and gas prices in 2022 are likely to be good for traditional energy companies
  • Green energy will remain an important area of investment over the long term

2021 should have been a stellar year for renewable energy stocks. In the UK we had the UN COP26 Summit. Over in the US, President Joe Biden announced a record spending package for green energy. However, clean energy stocks generally performed poorly last year.

What happened last year?

For some time, I have been looking at iShares Global Clean Energy UCITS ETF (LSE: INRG) for my own portfolio. This is an exchange traded fund (ETF), which allows me to invest in several companies by holding just one share.

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This ETF aims to track the performance of the S&P Global Clean Energy Index, which is designed to measure the performance of companies in the relevant sector, while also taking into account the carbon footprint of these companies.

The five-year performance of this fund has been impressive with an increase of around 100%. However, during 2021 it fell by around 36%.

Why did this happen? There are several reasons. First, in April, the index behind this ETF changed its methodology, which could have led to a sell-off. The changes allow the index to include more companies from a wider number of countries. The number of companies has increased from 30 to almost 80. Some commentators feel the fund’s theme is now “less green”, but I see including more companies as a positive development in general.

Second, during the last year, some of the US companies in the fund suffered because of bad weather affecting their output and hence their earnings (most noticeably in Texas).

Third, the worldwide energy crisis has seen money moving away from renewables in favour of traditional energy companies. In fact, some of the best-performing ETFs in 2021 were those involved in the oil and gas sectors.

Finally, there’s likely to have been some good old-fashioned profit-taking. Those investors who bought shares in the fund a few years ago would have been sitting on some substantial profits in the first half of 2021. Perhaps they used the opportunity to sell and realise some of those gains.

How might 2022 develop?

I believe that 2022 might be a difficult year for INRG. In fact, year-to-date it’s already down around 8%.

The energy crisis is far from over and it’s probable oil and especially gas prices will rise further. This is likely to be good news for traditional energy stocks, whose profits heavily rely on the prices of these commodities.

However, longer-term I remain optimistic for the fund. Not only does clean energy investment form part of the ethical sectors movement’s becoming increasingly popular, but this area is likely to benefit from international government support over the next decade. 

Renewable energy investment is vital if the world is going to achieve the goals of limiting global warming and tackling climate change. For this reason, I’m not abandoning this fund yet and will revisit it later in the year to see if it’s still a good option for my portfolio.

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Niki Jerath does not own shares in iShares Global Clean Energy UCITS ETF. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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