The Direxion Daily Global Clean Energy Bull 2X Shares (KLNE) is an ETF that seeks daily investment results of 200% of the performance of the S&P Global Clean Energy Index. This index is designed to track the performance of companies from developed markets whose economic fortunes are tied to the global clean energy business. Based on this, the ETF invests in a number of leading businesses in renewable energy supply and technology development, all of which with fairly good performances in terms of sustainable development and ESG implementation. This ETF has been recommended by various finance media, such as the US News, as one of the best Clean Energy ETFs to buy now.
Although the majority of holdings of this ETF and its focus on clean energy is laudable, its highly limited disclosure and lack of transparency has significantly dragged down its score in my opinion. More specifically, there is little information about how it decides which companies to invest in, and no information about the fund manager. Given its sole focus in clean energy, having no environmental specialists in the team could largely reduce consumer confidence and make some question its proficiency in making clean energy investment. Hence, the overall score given to this fund is 1.7.
The Top Ten Holdings of this fund are (NAME, percentage of portfolio), with a total net asset of 5.53 Million US Dollars:
1) Enphase Energy, 9.16%; 2) Vestas Wind Systems, 7.79%; 3) Consolidated Edison, 6.27%; 4) Orsted, 6.06%; 5) Solaredge Tech/D, 5.69%; 6) Plug Power, 4.99%; 7) Sse, 3.84%; 8) Energias De Portugal, 3.68%; 9) Iberdrola SA, 3.55%; 10) First Solar, 2.78%.
Altogether, almost half of the fund’s investments take place in electric unity, semiconductor equipment, and renewable electricity sectors. Alghouth this ETF is non-diversified, its focus on renewable energy and clean technology is commendable. Several of their top holdings are involved in the renewable energy sector. For example, Enphase Energy provides services in solar power installation with its revolutionary micro-inverter technology. Vestas is a mature company that manufactures and installs wind turbines, providing wind power related services to households. In general, the top holding firms all appear to be relatively socially responsible and environmentally sustainable. Although there is no one uniform sustainability index that measures all their performances, both of them have developed comprehensive sustainability and ESG frameworks and provided data on their carbon emission reduction progress. Additionally, in the 2022 “Most Sustainable Corporations” ranking by Corporate Knights, Vestas ranked No. 1 and Orsted ranked No. 7. Having these corporations at the top of their holdings list makes this fund particularly reliable in terms of sustainable investment. This makes its score in this section particularly high.
In general, there is very limited information on how exactly the fund selects its investment project and makes investment decisions, so the focus of this section will mostly be on its index. The underlying index of this fund, S&P Global Clean Energy Index, is made up of stocks of companies from around the world involved in the biofuels, ethanol, geothermal, hydroelectric, solar and wind industries. Additionally, this Index is limited to those stocks traded on a developed market exchange that meet or exceed, at the time of inclusion, $300 million in total market capitalization, $100 million in float-adjusted market capitalization, and $3 million average daily value traded over a six-month period.
From the above information, it can be seen that the most fundamental selection criteria of this index is monetary value and the industry in which the company belongs to. According to their holdings list, these standards appear to be fairly useful in identifying well-performed clean energy companies. However, simply relying on one index to make investment decisions may be insufficient because this index focuses too much on company size and potential return. Whilst this is understandable in any profit-maximisation scenario, In my opinion, the selection process could be made even better by considering more ESG and SDG factors. For instance, from a societal perspective, is the provision of renewable energy affordable and accessible to all nearby households? Is there any negative externality, such as noise from wind turbines and reflection from solar panels, imposed on nearby communities? If so, how to eliminate these negative impacts? From an environmental perspective, in the installation and maintenance processes of wind turbines and solar panels, is it possible to reduce carbon footprint? The underlying index could probably be even more comprehensive if it can consider companies’ performances in ESG and CSR achievement.
There is no accessible information about the fund manager anywhere . Given the degree of disclosure among ETFs nowadays, such lack of transparency could lower consumer confidence and make consumers question their proficiency. In particular, because little is known about the financial professionals behind the fund, there is no way to know whether there are any ESG or SDG specialists in the team to ensure their focus on clean energy is achieved properly.
The company this ETF belongs to, Direcxion, is not much of an expert in socially responsible and sustainable investment as well. There seems to be no ESG framework deployed within the entity. Their fund management team is composed of all pure financial experts, with no specialists in social and environment related areas. This makes their reliability in clean energy investment become slightly questionable.