Fossil Fuel ETFs vs. Green Energy ETFs


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Energy and energy independence have become one of the most crucial factors in how countries around the world operate and to take decisions. That being said, the Energy Select Sector SPDR ETF (NYSEARCA:XLE) and iShares S&P Global Clean Energy Index ETF (NASDAQ:ICLN) are two of the leading energy ETFs in the market that operate in two completely different spheres of the energy world.

Fossil fuels and green energy both make interesting arguments about how individuals should approach energy investing. Below, we detail the key differences between the two divisions, with XLE representing the fossil fuel space and ICLN supporting the green power market.

Performance: Looking at the returns of XLE and most oil and gas ETFs, market participants will notice that they have jumped rankings over the past year and a half, sending ICLN and clean energy funds skyrocketing. .

Over a period of one year, XLE is +60% while ICLN is down 6.5%. Zooming in further, we will notice that XLE is +41.9% YTD and ICLN is -0.6% in 2022.

Crude oil prices have surged since the start of 2021 as inflationary pressures mounted increasingly, supporting major oil and gas stocks.

However, from a longer frame, the ICLN and Green Energy ETFs outperformed XLE. Over a period of five to ten years, the ICLN is +147.5% and 125.7%. Over the same periods, XLE is only up 18.3% and +12.2%.

See below the detailed breakdown of the performance of the two funds over nine different periods:

Funds flow: XLE has taken the lead in attracting new funds as the fund has attracted $1.75 billion over the past year. Meanwhile, ICLN, the much smaller fund with $5.29 billion in assets under management compared to XLE’s $38.66 billion, brought in $907.9 million. While XLE may have doubled ICLN in capital inflows, the fund is also more than seven times larger.

To make matters more interesting, XLE has seen $1.46 billion out of the gate since March 1, when oil broke above $100 a barrel, signaling a potential top as market players take profits. At the same time, since the beginning of March, the ICLN recorded an increase in inflows of $266 million.

Geopolitics: The global and political landscape has a lot to do with the energy market. As tensions erupt between Russia and Ukraine, oil prices have hit recent highs. However, in doing so, it also makes the case for energy independence in the event of an oil surge.

The current state may favor oil and XLE at the moment, but the broader picture plays may tilt support towards ICLN and green power as governments around the world want to be carbon neutral in a distant future.

Conclusion: Investors will have to make their own decisions, but on the face of it, oil ETFs should be favored over green energy in the short term, is it too late to get involved, fund flows indicate yes. From a more distant perspective, green energy seems like the safer game, but leaving large upside swings on the fossil fuel ETF table makes it difficult to wait uncertainly. In any case, investors will need to choose the approach that best suits their needs when examining the energy market.

See the short-term 1-month chart below of XLE, ICLN and how they fared against each other and the SPDR S&P 500 Trust ETF (SPY) benchmark tracker.

Although XLE and ICLN are two of the most important energy ETFs that market participants tend to turn to, there are other options.

Oil & Gas ETFs: Vanguard Energy ETF (VDE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), VanEck Oil Services ETF (OIH) and Alerian MLP ETF (AMLP).

Green Power ETFs: Invesco Solar ETF (TAN), First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN), Invesco WilderHill Clean Energy ETF (PBW) and Invesco Global Clean Energy ETF (PBD).

As markets battle for direction on Monday, oil prices (CL1:COM) fell below $105 a barrel.


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