Clean Energy ETF Faces Record Outflows Amid Rising Interest Rates and Supply Chain Disruptions

The iShares Global Clean Energy ETF experiences a significant decline in investor interest and net outflows as interest rates rise and supply chain disruptions impact the clean energy sector.

The iShares Global Clean Energy ETF, the largest ETF in the United States tracking clean energy shares, is facing a challenging year as it records record outflows. The fund, which was once a favorite among investors during the pandemic, has seen a sharp decline in interest due to a combination of rising interest rates, surging raw materials costs, and supply chain disruptions. This article will explore the factors contributing to the decline in investor confidence and the impact on the clean energy sector.

Impact of Rising Interest Rates on Clean Energy ETFs

Higher interest rates have played a significant role in the decline of the iShares Global Clean Energy ETF. As interest rates rise, future earnings for growth stocks, including clean energy companies, are discounted. This makes financing projects like solar energy more expensive, leading investors to exit the ETF. Tom Bailey, head of research at ETF provider HANetf, explains that the higher rates have made clean energy investments less attractive, resulting in the significant outflows from the fund.

Supply Chain Disruptions and Rising Raw Materials Costs

Supply chain disruptions and rising raw materials costs have further compounded the challenges faced by the clean energy sector and the iShares Global Clean Energy ETF. The disruptions caused by the COVID-19 pandemic have impacted the availability and cost of materials needed for clean energy projects. Additionally, the U.S. import restrictions on solar panels have contributed to delays in clean power projects, particularly in the solar energy sector. These delays and increased costs have led to a decline in investor confidence and outflows from the ETF.

Performance Comparison and Asset Decline

The iShares Global Clean Energy ETF has underperformed the broader Energy Select Sector SPDR Fund, with a 30% decline in value compared to a 3% dip in the SPDR fund. This underperformance has further eroded investor confidence in the clean energy sector. The net assets of the iShares fund have nearly halved since the beginning of the year, currently standing at $2.7 billion. In contrast, the net assets of the Energy Select Sector SPDR Fund have only experienced a 4.5% slip, totaling $38.2 billion.

Challenges in the Solar Energy Sector

The Invesco Solar ETF, another prominent clean energy ETF, has also faced significant challenges this year. The fund has shed 38% of its value and is on track to post record annual outflows since its launch in 2008. Elevated raw material costs and project delays have contributed to the decline in the solar energy sector. Solar energy facilities have accounted for two-thirds of clean power project delays since late 2021, partly due to import restrictions on solar panels in the U.S.

Turmoil in the Offshore Wind Industry

The U.S. offshore wind industry has also experienced turmoil, with developers seeking to renegotiate or cancel contracts due to soaring costs. Companies like Orsted have taken multi-billion dollar writedowns on projects as they grapple with the financial implications of the industry’s challenges. The combination of supply chain disruptions, rising raw materials costs, and project delays has created a challenging environment for offshore wind development.

Conclusion:

The iShares Global Clean Energy ETF and other clean energy ETFs are facing significant challenges in 2022. Rising interest rates, supply chain disruptions, and elevated raw materials costs have led to record outflows from the funds. The decline in investor confidence and the underperformance of clean energy ETFs highlight the complexities and uncertainties faced by the clean energy sector. As the industry navigates these challenges, it is important for investors to exercise caution and consider the potential risks associated with legacy projects. Despite the struggles faced by clean energy ETFs, uranium-linked ETFs have experienced a rally as uranium prices soar, showcasing the diverse dynamics within the alternative energy space.