3 Months ago, global clean energy stocks took a bit of a nose dive. In particular, the ETF we hold in our portfolio that cover these types of stocks – The iShares Global Clean Energy ETF (INRG) dropped more than 30% between January and February. Today though, we’re doubling down on clean energy stocks. We bought the dip when it dipped in February and we’re still buying now, even though it hasn’t showed any signs of recovering to the January levels. Read on to find out why we think clean energy is worth backing now.
As always, the following is not financial advice, read our disclaimer
Why did it crash?
To understand if it’s worth still investing, we need to understand why it dipped. Back in January, at it’s peak, INRG hit a record 1421p on Jan 6th, before plummeting to under 900p by March 4th. The main reasons for this are two fold. First, investors felt that surging prices – especially in stocks like clean energy that benefitted immensely in 2020 – had gone too far during the pandemic bull run and were just waiting for a little bad news to trigger a sell off. Then, treasury yields and interest rates started to creep upward a little. Boom, mass selling of stocks like INRG.
It’s important to remember as well that much of the clean energy sector is loss making. These solar, wind, hydrogen and other companies are usually heavily subsidised by Governments in order to develop their technologies, so the high prices of 2020 was mostly speculation that these companies will one day be dominant in global energy.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”-Warren Buffett
Sounds concerning, so why are we investing?
Because it’s on sale (relatively)
Ok so this might seem like an obvious one, but INRG has set a precedent that it can hit 1425p. Granted, it may take some years to get back to those heights (it could also never make it again) but it has once already and we think that’s a good sign that good news in this sector will give it legs in the future. Not only that, big picture, when people are selling ETF’s, it usually triggers us to buy (or at least look at the data a little closer). Rarely do you get the opportunity to buy an ETF that contains many great companies at a discounted price, so when it does, look a little closer. You may not ever get another chance to buy it this low. Remember, money invested today is worth more than money invested tomorrow.
OK, again, this should be a no brainer. Although there are some concerning points (especially around the high prices and the loss making nature of many of the companies), we think that renewable energy is here to stay and will become an even greater focus for world governments in the coming years and decades. With more people adopting electric vehicles and governments around the worlds incentivising clean energy, were betting that some of these stocks will become stock market power houses in the future. There are very few investments out there that give us as much future confidents as clean energy stocks. The price may only be 20% down from its high right now, but you’re not going to care about that in 20 years time right?
INRG took a double hit in January and fell more than most clean energy stocks. The reason for this, in addition to the reasons listed above, is that there were some concerns over the weighting and liquidity of the smaller cap stocks in the ETF. INRG is designed to follow the S&P Clean Energy Index, which includes just 30 pure clean energy stocks. During the bull run of 2020, billions poured into the ETF and iShares ended up having huge holdings in some relatively small cap energy stocks – which artificially inflated the prices of those stocks by basically having too few stocks in its list.
The good news is that S&P recognise this and are looking at increasing the number of companies in the index from 30 to 82 at latest count. This will give some much needed diversification – the previous 30 companies were pure clean energy (i.e, they were concerned with the production of renewable energy only) however the new list will include companies that have clean energy interests but aren’t necessarily pure clean. We’re ok with this, because some of the biggest renewable energy investors in the worlds are actually non-renewable energy companies, or not even energy companies at all, but could one day make the transition to pure clean energy in the future. This way, we don’t miss out on companies that although aren’t there yet, could be leading the way in the future.
We plan on continuing to drip feed INRG (and buy more when it dips low) because we plan on holding it for 20+ years.
Thanks for reading! Head on over to our cheapskate portfolio section HERE to find out what else we’ve invested in.
Are you investing in clean energy? Let us know your thoughts by leaving a comment below!