Climate change funds

sma3

Barron's had a short article on Climate change funds, maybe in honor of the Glasgow conference.

https://www.barrons.com/articles/climate-policies-fund-choices-51636068332?mod=past_editions

I have been putting small amounts into solar, wind and alternative energy ETFs mostly but a lot of them seem based only on indexes, and I think active management has a far better chance of success.

The other push for "ESG" funds seems to be too broad to allow a focus only on the transition to a low carbon environment.

This will concentrate on alternative energy, grid development, energy storage, nuclear power, materials like lithium, uranium, carbon capture, water infrastructure etc, not good governance, inclusiveness, or other desirable social goals that have little to do with low carbon.

There seem to be only a few actively managed Climate Change Funds available, like GMOs' GCCHX but it has minimums far out of the reach of mere mortals. A number of hedge funds are getting involved, and have lots of information, but again unless you have $1,000,000 or more you are on your own.

Has anyone done any significant research here?

AndyJ

I agree there's a place for an actively managed, focused climate solutions oef or etf. I did a halfway serious search about a year ago and came up empty; seemed the cap-weighted index etf's were the best options, and some of them had/have very limited volume.

If anyone's got ideas on the subject, I'm all screen eyes.

Graust

I’ve owned ALTEX, ALTEX Alternative Energy Fund, and continue to own Guinness Atkinson Alternative Energy Fun’s, GAAEX.

They’ve treated me better than QCLN, ICLN, and some of the other ETFs that I bought at the very end of the speculative growth peak from Dec ‘20-Feb ‘21 (which would be poor timing/speculation on my part…briefly had a fling with disruptors haha).

sma3

@graust

Thank you for the suggestions. I had forgotten about GAAEX, although I have looked at it in the past.

Will look at them and report back.

I think you can break down the ideas into a lot of categories and find ideas and ETFs for most of them. This is not the ideal, as most ETFs are index funds and the solutions are likely to come form ideas little known now

the things I am looking at are Alternative energy, Industrial electrification, energy storage, nuclear power, Basic materials that are necessary ( ie copper, Lithium, nickel uranium, and industrial processes like carbon capture, Water infrastructure, recycling and process innovation.

A lot of the ETFs load up on the latter with MSFT, GOOGL, and of course TSLA

WABAC

I have been looking into these for my wife's accounts. And Tesla can be an issue depending on the underlying index. Given the recent runup These are fund whose returns aren't so heavily influenced by Tesla.

Descriptions are from etf.com. For various categories of energy I'm looking at:

PBD

passively managed to invest in a wide array of global renewable energy companies, including those involved in conservation, improving energy efficiency and advancing renewable energy. The index may invest in large cap firms and those that derives at least 10% of its market value from clean energy activities, but has bias on pure-play, small- and midcap companies. Importantly, PBD’s portfolio companies are selected based on the index provider’s opinion of their “potential for capital appreciation.” In that sense, PBD is more akin to an actively managed strategy than other funds in the segment. The index is rebalanced and reconstituted quarterly. For diversification, the fund caps its largest holdings at 5% and is required to invest half its assets internationally.

ICLN

ICLN invests in global clean energy companies, which is defined as those involved in the biofuels, ethanol, geothermal, hydroelectric, solar, and wind industries. Aside from holding companies that produce energy through these means, ICLN also includes companies that develop technology and equipment used in the process. Selected by the index committee, the fund is weighted by market-cap and exposure score — subject to several constraints — and reconstituted semi-annually. Prior to April 19, 2021, the index followed a more narrow methodology.

Both are down this year. But that's a feature for me. Ten year returns seem reasonable compared to traditional utilities. There isn't much overlap in their top ten holdings anyway. They weight sectors differently. Neither has much exposure to China. Another feature as far as I am concerned.

Then there is GRID.

GRID is concentrated fund targeting global equities determined to be in the smart grid and electrical energy infrastructure sector as determined by Clean Edge. The fund includes companies that are either Pure Play — more than 50% revenues or Diversified — less than 50% revenues are derived from the smart grid and electrical energy infrastructure sector. The sector may include business in electric grid, electric meters and devices, networks, energy storage and management, and enabling software. GRID also screens for minimum liquidity and market cap. To enhance exposure to the smart grid market, the index provider uses a tiered weighting scheme. Securities are initially market cap weighted. Then a collective weight of 80% for Pure Play and 20% for Diversified are allocated. The Index is reconstituted semi-annually and rebalanced quarter.

GRID is on the MFOpremium Honor Roll. Lipper/Refinitiv lists it as global infrastructure.

I am also looking at three water funds:

CGW

The fund starts with all eligible securities from the S&P Global BMI Index that are classified in either water equipment & materials or water utilities & infrastructure cluster. To identify industry relevance, each company from both clusters will be assigned an exposure score based on its business description and most recent reported revenue. The 25 largest companies with an exposure score of 1 from each cluster will be selected for inclusion. However, if fewer than 25 companies have an exposure score of 1, the fund will select the largest companies with a 0.5 exposure score until the portfolio contains a total of 25 constituents for each cluster. Stocks are weighted by market-cap within each bucket and are constrained, such that securities with an exposure score of 1 are capped at 10% and those with 0.5 exposure score are capped at 5%. Index rebalancing occurs semi-annually.

PIO

The fund's (ironically appropriate) liquidity-weighting scheme produces a concentrated portfolio that only loosely resembles our market-cap-weighted benchmark. PIO is dominated by large- to midcap firms that create products that conserve and purify water for homes, businesses, and industries. Also, only companies participating in the “Green Economy” as determined by SustainableBusiness.com LLC are eligible for inclusion. The index currently limits weighting in both the country and issuer level, to ensure diversification between constituents. Lastly, it is important to note that the fund uses a “full replication” method to track the underlying index. Rebalancing is done quarterly while reconstitution is done annually.

FIW

FIW holds 36 of the largest US-listed water companies, ranked by market cap and weighted equally within five tiers. Companies of any market capitalization that derive revenue from the potable and wastewater industry are selected. In addition, its tiered equal-weighting scheme boosts the weight of small- and micro-cap companies, hence, reducing concentration. FIW changed its name from First Trust ISE Water Index Fund to First Trust Water ETF on December 14, 2016, which had no impact to FIW's investment strategy. The index is rebalanced and reconstituted semi-annually.

Still not too much overlap for me.

I check out holdings and weights using this link to the old M* data:format

http://portfolios.morningstar.com/fund/holdings?t=fsmex&region=usa&culture=en-US

Just replace the FSMEX with the code you want to look up.

Observant1

"The good news is that if you believe that innovation in climate technology is set to take off, the investment industry has introduced a raft of new funds globally. The bad news is that many are unproven and much more volatile than diversified equity funds. Twelve of the 29 funds exhibited below were introduced in the last three years. Climate tech funds with at least a three-year track record have an average three-year standard deviation of 29.5 versus 18.4 for the Vanguard 500 fund."

"In addition, investment funds must own publicly traded companies. But there are very few of these, relative to privately held companies, and they are concentrated in competitive industries such as solar-panel manufacturing and mining commodities such as lithium."

Link

WABAC

Observant1 said:

"The good news is that if you believe that innovation in climate technology is set to take off, the investment industry has introduced a raft of new funds globally. The bad news is that many are unproven and much more volatile than diversified equity funds. Twelve of the 29 funds exhibited below were introduced in the last three years. Climate tech funds with at least a three-year track record have an average three-year standard deviation of 29.5 versus 18.4 for the Vanguard 500 fund."

"In addition, investment funds must own publicly traded companies. But there are very few of these, relative to privately held companies, and they are concentrated in competitive industries such as solar-panel manufacturing and mining commodities such as lithium."

Link

I don't plan on putting more than 10% into these funds altogether.

I excluded CNRG from my final list because of its youth, the nearly 5% stake in Tesla, and a nearly 8% weight in China. Its three year return has been superior to the funds I chose above. OTOH, I am specifically interested in a more diverse global lineup than CNRG provides.

sma3

Thanks for all the input and interesting ideas.

I missed the M* article, but I have dropped a lot of their stuff as it is all nonsense.

How can you take a firm that claims to be aimed at individual investors seriously, when it includes funds (GCCHX) with $5,000,000 minimums?

Observant1

sma3 said:

Thanks for all the input and interesting ideas.

I missed the M* article, but I have dropped a lot of their stuff as it is all nonsense.

How can you take a firm that claims to be aimed at individual investors seriously, when it includes funds (GCCHX) with $5,000,000 minimums?

M* started out as a firm focused on individual investors.
Their focus has shifted more towards advisors and asset managers in recent years.
I find value in M* Fund Analyst Reports, FundInvestor newsletters, Portfolio X-Ray, The Long View podcasts, and various articles.
However, not all of their content is high-quality.
Some M* content doesn't quite measure up.

Mitchelg

I have a good sized position in HEOIX. Managed by Wellington. Has done well for me.

WABAC

I was looking at some of my old notes today. I see I forgot a couple of the ETF's I was looking into. Descriptions are from etf.com.

RNRG

RNRG offers exposure to companies that produce energy from renewable sources including wind, solar, hydroelectric, geothermal, and biofuels including YieldCos — a holding company for renewable energy projects that have been spun off by a larger energy utility. The portfolio is market-cap-weighted, with a cap of 6% on individual names. While YieldCos are sometimes marketed as MLPs for renewables, note that these firms use a traditional C-corp structure with no inherent tax benefits. Dividends from the fund are taxable. The Fund name and investment strategies changed effective November 19, 2018. The fund originally tracked the Indxx Global YieldCo Index through November 16, 2018 and the Indxx YieldCo & Renewable Energy Income Index thereafter. On Feb. 1, 2021, the fund name, ticker (YLCO) and index changed, dropping its focus on YieldCos while still including them in the fund.

You can read more about yieldco's here:
https://cleanenergysolutions.org/instruments/yieldcos

SIMS is similar to GRID, but gets into more than just smart electrical transmission:

SIMS is passively-managed to provide exposure to firms which the index provider defines as companies involved in: smart building infrastructure, smart power grids, intelligent transportation infrastructure, or intelligent water infrastructure. Each company is further classified as either “core” or “non-core,” depending on the level of involvement in innovative infrastructure. The index is initially equally weighted, but then tilts the overall portfolio weight towards core firms by 20%. As a result, pure plays are overweighted. Prior to June 25, 2019 the fund traded under the ticker XKII.