Market Overview

Fundamental Gusts Can Propel A Wind Power ETF

Fundamental Gusts Can Propel A Wind Power ETF

Broadly speaking, alternative energy exchange traded funds are performing well this, but there are some members of this group that are disappointing.

What Happened

Underscoring the strength in the clean energy ETF patch this year, the First Trust Global Wind Energy ETF (NYSE: FAN) is up just 13.17%, but some fundamental data indicate wind energy names could be credible alternative energy plays over the long term.

FAN, which recently turned 11 years old, tracks the ISE Clean Edge Global Wind Energy Index.

“Companies in the index universe that are identified as providing goods and services exclusively to the wind energy industry are given an aggregate weight of 66.67% of the index,” according to First Trust.

“Those companies determined to be significant participants in the wind energy industry despite not being exclusive to such industry are given an aggregate weight of 33.33% of the index. This weighting is done to ensure that companies that are exclusive to the wind energy industry, which generally have smaller market capitalizations relative to their multi-industry counterparts, are adequately represented in the index.”

Why It's Important

Along with solar, wind power is the leader in clean energy adoption around the world, but most of that adoption is outside the U.S. FAN reflects the global nature of the wind energy business with exposure to 10 countries, led by Denmark at 18.19%. Half of FAN's country exposures are European nations, reflecting that region's above-average adoption of wind power.

“The offshore wind industry will continue to witness a healthy growth driven by rapidly falling costs due to economies of scale and new technology developments,” said IHS Markit in a recent note.

“Currently, over 61 GW worth of capacity are under different stages of development, mostly concentrated in mainland China and Europe. Emerging markets such as Japan, South Korea, Taiwan, Vietnam, and the United States will appear shortly on the global stage.”

FAN devotes nearly 12% of its combined weight to China and Japan. China, the world's second-largest economy, is actively trying to reduce its massive pollution footprint.

What's Next

As is the case with other clean energy options, declining costs are among the positive factors seen boosting wind adoption.

“Costs will continue to decline owing to technological improvements across the value chain including new generations of turbines, foundations, substations, cables, installation and operations and maintenance (O&M) services, and ports and vessels sustaining the development of offshore wind,” according to IHS Markit.

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