Earlier this month, TriLine Index Solutions, the index and ETF development arm of Boone Pickens Capital Fund Advisors, announced the launch of a new renewable energy ETF via the change of the NYSE® Pickens Oil Response™ ETF (NYSE: BOON) to the Pickens Morningstar® Renewable Energy Response™ ETF (NYSE: RENW).
RENW will seek to track the Morningstar® North America Renewable Energy IndexSM, which is administered and calculated by Morningstar, Inc.’s index group to provide exposure to companies that operate across the full renewable energy supply chain, including renewable energy innovators, suppliers, adopters, and end users.
The index is composed of two distinct constituent groups. The first constitutes 75% of the total index weight and consists of companies with meaningful revenue from renewable energy production or participation in businesses that rely on renewable energy, such as green transportation. The second group constitutes 25% of the total index weight and includes companies that are leaders in meeting their primary energy requirements from renewables. Renewable energy revenue and renewable energy usage are determined by data from Sustainalytics, a leading provider of global environmental, social and governance (ESG) research and ratings.
ETF Trends caught up with Toby Loftin, Managing Member of BP Capital Fund Advisors and Founder of TriLine Index Solutions, to discuss the change of the ETF.
What sort of benefits are immediately apparent in reconfiguring into a renewable energy ETF?
Toby: Reconfiguring the ETF from BOON to RENW should appeal to investors looking to capitalize on the multi-decade megatrend shift of decarbonization. RENW offers exposure to a variety of S&P sectors each of which have a fundamental relationship with renewable energy generation or consumption. While BOON was intentionally highly correlated to the underlying change in commodity prices, RENW’s performance will be driven more by technological advances, economies of scale, environmental conscious demand growth and governmental policy support.
Investors have a wide variety of investment strategies focused on renewable or clean energy. However, most of these strategies focus on individual nodes of the renewable energy supply chain, leading to industry homogeneity across their holdings. As a result, many of these strategies can be subject to a high degree of volatility.
RENW reflects the notion that involvement in renewables can take many forms. Some companies operate energy generation facilities using naturally replenished sources—the sun, wind, and water. Others offer products or services, such as wind turbines or hydrogen fuel cells, that support clean power. Then there are firms applying renewable technologies to the field of transportation (electric cars for example). Finally, there are companies that rely on renewables to meet their own needs, thereby reducing carbon emissions.
Along these lines, RENW represents a differentiated offering, providing exposure to companies that operate across the full renewable energy value chain. This includes renewable energy innovators, suppliers, adopters, and end users. While staying true to the broader secular trend towards increased renewable energy adoption, RENW’s construction provides a wider range of sector and industry exposures than other offerings similar in name. In analyzing 20 investible strategies available to investors in the US, each tends to concentrate assets into very few sectors, ignoring many important and relevant segments of the economy. RENW, however, has at least some exposure to every single economic sector as of July 2019.
Is it easier or challenging to garner more interest in this sort of ETF reconfiguration? Is there any pushback?
Toby: We believe it should be easier since RENW is the only Renewable Energy ETF product that offers not only a quantitative basis for constituent selection (leveraging Morningstar’s Carbon Risk Rating system and Sustainalytics ESG data and research), but also the only one offering investors exposure to the entire value chain from producer to end user.
What sort of data helps in making this move?
Toby: Research shows that investors of all kinds view sustainability as important to their investment portfolio, and that old stereotypes of “ESG Investors” are incorrect. Study after study illustrates our collective need to embrace improvement in environmental practices related to traditional fossil fuels and also our need to embrace renewable sources of energy.
Nearly $2 billion in ETF assets target either Renewable / Clean energy or low-carbon target strategies. Several of RENW’s peers focus either on only one niche type, or technology area (i.e. solar, wind or EVs), or are global generalists that do not offer full value chain exposure.
When considering the different sectors that come into play, are there areas that now feel more valuable to cover? Ones that can be shifted away from?
Toby: Since our process is quantitative and based on Morningstar’s Carbon Risk Rating system and Sustainalytics ESG data and research, we are agnostic to what sectors result from the process. We believe those companies producing and consuming renewable energy are important investment exposures.
Does a sign of long-term success seem achievable enough from the current perspective? Or is there anything possibly in the way or that could come along to upset progression?
Toby: Even though there is $2 billion in renewable and clean energy ETF assets, we believe there is a larger market opportunity. There are investors on the sidelines who simply want a less volatile investment with exposure across renewable energy types (wind, solar, EV, etc.) and market sectors (utilities, industrials, materials, technology, etc.).
In terms of risk to the progression – renewable energy industries like wind and solar are still not fully cost-competitive in every part of the globe (although they are cheaper in many areas) relative to non-renewable energy industries. So there is the risk of a slowdown in this cost competitiveness. However, capital costs for solar and wind capacity have been plummeting, mainly due to the benefits of rapidly improving technology and increasing customer awareness and adoption. It is a strong probability that renewable energy will continue on its current projection.
Can you speak on the choice to make this configuration from an environmental standpoint? The market is important, but do you think that also reflects what investors look at in the world?
Toby: The argument of RENW is both an economic one and an environmental one. Renewable Energy is beyond the point of a decade ago where you had to be a “believer” or “environmentalist” to take a chance on technologies unproven at scale. The industry has reached an inflection point where renewables offer a lower levelized cost of energy to end users than traditional fossil fuels in many parts of the US and world. For example, according to the EIA (US Energy Info Admin), renewables surpassed coal for electricity generation for the first time in April, 2019. Investors don’t need to invest in the sector based on an environmental philosophy any longer, the opportunity of RENW is to participate in the fastest growing segment of the energy industry that is taking share and will reduce the input costs of practically every industry of the S&P over time. However, there is also an environmental reason we believe RENW’s construction is favorable. If investors want to positively impact the environment they should be financially supporting those companies who are not only producing renewable energy, but also consuming it. The more consumption of renewable energy that takes place – the lower the cost of renewable energy and the less use of carbon emitting energy sources.
Why should people invest in RENW?
Toby: RENW is the only ETF offered in the market that offers pure North American exposure to the megatrend of decarbonization and market share shift from fossil fuels to renewables while also giving investors exposure to the entire value chain from producer to end user. From a factor exposure standpoint, RENW’s portfolio has less volatility, less risk of distress and better financial health than its peers as it avoids the idiosyncratic risk of making a bet on only one particular renewable technology. Lastly, it is also the only ETF constructed with a rigorous quantitative model that includes holdings based on a company’s carbon risk rating, and percentage of renewable energy production and consumption.
Which kinds of holdings now serve as the most important?
Toby: Holdings across the value chain, both the producers and consumers of renewable energy, are equally valuable. It’s important to the investor that RENW invests in multiple renewable energy types (wind, solar, EV, etc.) and in multiple sectors (utilities, industrials, materials, technology, etc.).
For more information on RENW, visit www.renewableenergyetf.com.