Thematic hotshots in the clean energy and blockchain ETF segments have experienced significant losses in the third quarter of this year. This can be attributed to hawkish central bank messaging and rising sovereign bond yields, which have cast a shadow over riskier and indebted nascent sectors.
Among the clean energy subthemes that suffered losses last quarter were the HANetf Electric Vehicle Charging Infrastructure UCITS ETF (ELEC), the Invesco Solar Energy UCITS ETF (ISUN), the Global X CleanTech UCITS ETF (CTEK), and the Global X Hydrogen UCITS ETF (HYDR), which fell by 29.9%, 27%, 23.9%, and 22.3%, respectively.
Even broad clean energy thematics were not immune to these losses. The iShares Global Clean Energy UCITS ETF (INRG), the world’s most popular clean energy ETF, returned -20.2% in the three-month period, reaching its lowest level since July 2020.
These declines can be attributed to the sensitivity of clean energy subsectors to interest rate hikes. With the Federal Reserve’s funds rate maintained at a two-decade high, borrowing costs for utility operators looking to expand their capacity have increased. The International Energy Agency (IEA) also found that rate hikes have an adverse effect on the cost of energy generation from renewable sources, particularly wind and solar. This has created headwinds for growth stocks in the clean energy sector.
Kenneth Lamont, senior fund analyst at Morningstar, pointed out that raising the rate used for discounting expected future cash flows hits growth stocks harder because those cash flows are expected later and, therefore, get discounted more. This, coupled with falling prices and concerns of overcapacity in clean energy subsectors, has contributed to the challenging quarter for clean energy ETFs.
Similarly, blockchain ETFs have slumped in the face of hawkish messaging from Federal Reserve Chair Jerome Powell and his peers. The Global X Blockchain UCITS ETF (BKCH), the WisdomTree Blockchain UCITS ETF (WBLK), and the VanEck Crypto and Blockchain Innovators UCITS ETF (DAPP) experienced losses of 24.3%, 20.6%, and 20.4% in Q3, respectively.
The Fed’s policy rhetoric of “higher for longer” and the subsequent rise in 10-year US Treasury yields have increased the income potential of safer assets, such as US sovereign debt. This has detracted from the gains of riskier assets like blockchain mining equities, which had previously seen substantial growth in the first half of the year.
Another factor contributing to the decline in blockchain ETF valuations could be continued uncertainty and delays in the approval of a spot bitcoin ETF in the US by the Securities and Exchange Commission (SEC).
In addition to the challenges faced by clean energy and blockchain ETFs, cannabis thematic ETFs in Europe may have reached their end. HANetf announced a merger of its Medical Cannabis and Wellness UCITS ETF (CBDX) into its HAN-GINS Indexx Healthcare Megatrends Equal Weight UCITS ETF (WELL), marking the effective end of the strategy. Rize ETF, on the other hand, was acquired by ARK Invest, raising questions about the future of products such as the Rize Medical Cannabis and Life Sciences UCITS ETF (WELL).
Overall, the third quarter presented significant challenges for thematic ETFs in clean energy, blockchain, and cannabis sectors. The hawkish central bank messaging, rising bond yields, and other factors mentioned have contributed to the punishing losses experienced by these ETFs. However, the long-term potential of these sectors remains intact, and investors should consider these pullbacks as opportunities to enter positions at more favorable prices.
