It's not "A Tale of Two Cities," but there's plenty of dichotomy in the energy sector this year. Shares of traditional fossil fuel producers, even with the benefit of a second-quarter rally, are badly lagging the broader market while alternative energy producers are soaring.
What Happened: Among the exchange traded fund stars of the clean energy group this year is the SPDR Kensho Clean Power ETF CNRG. CNRG is higher by almost 11% this year while the S&P 500 Energy Index is lower by nearly 38%.
CNRG tracks the S&P Kensho Clean Power Index, which provides exposure to solar, wind, geothermal, and hydroelectric power names.
Why It's Important: Bolstering the case for renewables, namely solar and wind, is that the group is rapidly becoming cheaper, facilitating increased adoption against rivals such as oil and natural gas. As just one example, in April and May, the U.S. produced more renewable energy than coal.
“The production of solar and wind energy was estimated to grow at significant pace this year, but as economies reopen, a spike in industrial activity and energy demand will likely accelerate the trend of seeking cheaper and more renewable sources of energy,” said State Street in a recent note. “In fact, as of June, the US is on track to produce more electricity this year from renewable power than from coal for the first time on record.”
Energy production is in the early innings of a seismic shift away from fossil fuels to renewables, a trend that bodes well for the long-term CNRG thesis.
“The great transition to greener forms of energy supply has occurred, firms focused on more sustainable forms of power generation have outperformed the broader market year-to-date (+10%), since the markets bottom on March 23rd (+14%), and over the past year (+26%) Plus, they have outperformed traditional energy firms by even much wider margins,” said State Street.
What's Next: On Sunday, news broke that Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) is paying $10 billion including debt for the natural gas transmission assets of Dominion Energy D.
Perhaps the big news is that Dominion is scrapping a pipeline project and that its asset sale to Berkshire signals a move to becoming a pure play alternative energy company focusing on natural gas, solar and wind transmission.
It's just one deal, but one that underscores the energy landscape is shifting and that shift should be to the liking of CNRG investors.
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