Clean energy ETFs: The ‘green’ Kondratieff – a new long-term cycle of economic growth

Jun 13th, 2012 | By | Category: Equities

The need for action prompted by climate change and the crises surrounding energy supply security will likely trigger changes in virtually every area of the economy. A new study from the Allianz Global Investors Capital Market Analysis team argues that this could lead to a new phase of growth. The world economy, suggests Allianz, may be at the beginning of a new long-term cycle of prosperity, or sixth Kondratieff cycle, characterised by a sustainable ‘green’ path of growth.

Clean energy ETFs | The ‘green’ Kondratieff – a new long-term cycle of economic growth

The world economy may be at the beginning of a new long-term cycle of prosperity characterised by a sustainable 'green' path of growth, argues Allianz Global Investors.

According to Dennis Nacken, Senior Capital Market Analyst and author of the study “The ‘green’ Kondratieff – or why crises can be a good thing”, this growth will differ from everything that has gone before.

The shift to renewable energies, in particular, demonstrates that growth would be much less consuming and much more regenerating. The key word is sustainability. “This is because under the new conditions imposed by globalisation, demographic development, climate change, scarce resources and greater awareness of, and responsibility towards, the environment on the part of consumers, growth will probably be generated from a new mix of economics and ecology,” says Nacken. “If we think even further outside the box, we might say that growth will shift from being parasitic to symbiotic.”

FEATURED PRODUCTS

PowerShares Global Clean Energy ETF (PSBW)
London listed, TER 0.75%

Credit Suisse Global Alternative Energy ETF (CSAE)
London listed, TER 0.65%

iShares S&P Global Clean Energy ETF (INRG)
London listed, TER 0.65%

ETFX DAXglobal Alternative Energy ETF (ALTE)
London listed, TER 0.65%

Amundi Green Tech Living Planet ETF (AWWF)
London listed, TER 0.45%

DB X-Tracker S&P US Carbon Efficient ETF (XGRC)
London listed, TER 0.50%

EasyETF FTSE Environmental Opportunities 100 (UET)
Euronext listed, TER 0.45%

Nacken points out that political support is needed to speed up the structural change from parasitic to symbiotic economic growth. “This change will only gain pace once environmental consumption becomes a cost factor. This means, the environment must get a price tag.”

The first steps are already being taken in this direction. For example, the number of countries who have added the expansion of renewable energies or similar policies to their political agendas more than doubled, from 55 to 119, between 2005 and 2011. And what is really astonishing in Nacken’s view is that more than 50 percent of these countries are emerging markets.

Most of the underlying technologies that Kondratieff would stipulate as necessary for the beginning of a new cycle of prosperity are already in place. They result from the connection of information technology with the ‘green’ markets. Examples are the switch to renewable energies, the use of energy storage, and smart grid systems. Nacken concludes: “As investors with a long-term horizon – which by all means includes environmental protection – we should see the world through the eyes of Schumpeter and Kondratieff and look beyond the crisis. The signs of the next growth cycle are already appearing.”

Assuming the analysis of Allianz Global Investors is correct and we are indeed on the cusp of “a new long-term cycle of prosperity characterised by a sustainable ‘green’ path of growth”, companies that specialise in green technologies and clean energy are likely to be key beneficiaries. For investors looking to get exposure to this theme, there are a number of different ETFs available, tracking a range of specialist indices. Following is a selection of those listed on the London Stock Exchange (LSE):

PowerShares Global Clean Energy ETF (PSBW)
The PowerShares Global Clean Energy ETF tracks the WilderHill New Energy Global Innovation Index. This index is comprised of companies worldwide whose technologies and services focus on the generation and use of cleaner energy, conservation, efficiency, and advancing renewable energy generally. Physically replicated, the top five holdings include Energy Development, Ormat Technologies, Brookfield Renewable Energy Partners, China Everbright and Covanta. The fund has a mid-cap blend/growth bias, with significant weights in Industrials, IT and Utilities. The fund is well diversified with around 90 holdings, though companies from the US and China make up approximately 44% of the fund. London listed, TER 0.75%.

Credit Suisse Global Alternative Energy ETF (CSAE / CAE1)
The Credit Suisse Global Alternative Energy ETF tracks a proprietary index offering investors exposure to 30 of the largest companies involved in the wind, solar, bioenergy/biofuels, natural gas and geothermal energy sectors. Physically replicated, the top five holdings include Applied Materials, Nextera Energy, Archer Daniels Midland, LG Chem and Iberdrola. The fund has a large-cap value bias, with significant weights in Utilities, Energy, Consumer Goods and Industrial Materials. The fund is fairly well diversified on a country level with exposure to developed and emerging markets. That said, the US and South Korea dominate with a combined weight of 53%. London listed, TER 0.65%.

iShares S&P Global Clean Energy ETF (INRG)
The iShares S&P Global Clean Energy ETF tracks the S&P Global Clean Energy Index. This index provides exposure to the 30 largest and most liquid listed companies globally that are involved in clean energy-related businesses. Physically replicated, the top five holdings include China Everbright, Covanta Energy, CEMIG, Empresa and COPEL.  The fund has a mid-cap value bias, with significant weights in Industrials, IT and Utilities. The fund is fairly well diversified on a country level, with significant representations from China, US, Japan and Brazil. London listed, TER 0.65%.

ETFX DAXglobal Alternative Energy ETF (ALTE)
The ETFX DAXglobal Alternative Energy ETF synthetically tracks the DAXglobal Alternative Energy Index. This index tracks the performance of approximately 15 alternative energy companies generating more than 50 percent of their revenues in one of the following five sub-sectors: Natural Gas, Solar, Wind, Ethanol, Geothermal/Hybrids/Batteries. Three companies have been selected from each of these five energy sub-sectors. The five segments are equally weighted. Top five holdings include Nextera Energy, Archer Daniels Midland, BG Group, Bunge and EDP Energias Portugal.  The index has a large-cap value bias. Holdings such as ADM and Bunge provide it with significant exposure to agribusiness – an interesting theme in its own right. The index is highly concentrated with just 15 holdings and, while ten countries are represented, the US makes up almost 40%. London listed, TER 0.65%.

Amundi Green Tech Living Planet ETF (AWWF)
The Amundi Green Tech Living Planet ETF synthetically tracks the Living Planet Green Tech Europe Index. This index overweights European companies that generate at least 20% of their revenues from green/renewable sectors, while excluding non-green and “unethical” companies. The index holds 50 stocks, the top five of which are currently Severn Trent, Groupe Eurotunnel, United Utilities, Spirax-Sarco and Aixtron.  The index has a large-cap value bias, with significant weights in Industrials (52%) and Utilities (27%). The index is centred on developed, Western Europe, with the UK, German and France making up almost 60%. View this fund as a defensive European play. London listed, TER 0.45%.

Other European-domiciled ETFs to consider include:

DB X-Tracker S&P US Carbon Efficient ETF (XGRC). Tracks the performance of [no more than] 375 US-based companies with relatively low carbon emissions (as measured by Trucost Plc), while seeking to closely track the return of the S&P 500, its parent index. Basically a US large-cap fund for the carbon conscious. London listed, TER 0.50%.

EasyETF FTSE Environmental Opportunities 100 (UET). Tracks 100 of the largest global companies by market-cap that generate at least 20% of their business from involvement in environmental activities, including renewable & alternative energy, energy efficiency, water technology and waste & pollution control. Euronext listed, TER 0.45%.

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