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Energy ETF performance: The role of fossil fuels

Author

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  • D’Ecclesia, Rita Laura
  • Morelli, Giacomo
  • Stefanelli, Kevyn

Abstract

The Principles for Responsible Investment (PRI) affected the financial markets since the year 2000. Asset managers and investors consider Exchange Traded Funds (ETFs) as a popular investment vehicle that represents a source of growth for sustainable strategies. Clean Energy ETFs (CE ETF) are funds that invest in stocks of alternative energy sectors such as solar energy, wind, hydroelectric, and geothermal companies. In 2022, CE ETF recorded a rate of return equal to 3.3% in a quarter. We investigate the role of sustainable ETFs in portfolio management analyzing features of the most capitalized ETFs over the last decade (2012–2022), distinguishing between CE ETFs and Fossil Fuel ETFs (FF ETFs). Using daily quotes, we compare the performance of various mean variance portfolios each including only CE ETFs, only FF ETFs, and a mix of the two. We show that the CE ETFs portfolio does not always provide a better risk–return trade-off, but it often beats the FF one. Given the time-varying features of the volatility of ETF returns, we use a GARCH framework and analyze the various portfolios’ performance in different sub-periods, to take into account the pandemic crisis, the Paris Agreement, and the Ukranian conflict. We find that portfolios’ performance is highly affected by i) market conditions, and ii) sustainability-related events. In addition, with respect to our observation period, we show that the exclusion of FF ETFs does not decrease the profitability of the portfolios.

Suggested Citation

  • D’Ecclesia, Rita Laura & Morelli, Giacomo & Stefanelli, Kevyn, 2024. "Energy ETF performance: The role of fossil fuels," Energy Economics, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:eneeco:v:131:y:2024:i:c:s0140988324000409
    DOI: 10.1016/j.eneco.2024.107332
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    1. Atta Ullah & Xiyu Liu & Muhammad Zeeshan & Waheed Ullah Shah, 2024. "Evaluating Growth and Crisis Risk Dynamics of Sustainable Climate Exchange-Traded Funds," Sustainability, MDPI, vol. 16(22), pages 1-20, November.

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    More about this item

    Keywords

    Energy ETF; Renewable energy; Portfolio optimization; Green finance; Fossil fuels;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q01 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Sustainable Development
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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