First Trust Global Wind Energy ETF

overall rating:

0.85

planets

Sophia Schwartz
7/18/2022
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The First Trust Global Wind Energy ETF (FAN) is an exchange-traded fund with an investment objective to "seek investment results that correspond generally to the price and yield, before the Fund's fees and expenses, of an equity index called the ISE Clean Edge Global Wind Energy Index™." CleanEdge, an index curator that focuses on the clean tech economy, describes the purpose of the index that FAN is based on to a be a method of tracking the performance of companies involved and engaged in the "wind energy sector and diversified multinationals with wind energy sector exposure." First Trust sticks to the name of the fund by finding a very specific index to Wind Energy. First Trust turns to a ESG-conscious and specifically clean tech investment advisor for fund management, and the results are indicative of this decision as opposed to other funds operated by managers lacking any experience in ESG. This fund is far from perfect but I am impressed with how strict the screening guidelines are for wind energy investments, and the outside consultation of a clean tech advisor signals a step in the right direction for FAN.

What it's made of:

1.75

The FAN Global Wind Energy ETF's total net asset amount to 280 million dollars, and The top 10 equity holdings are as follows: 

 

Name of company, % of portfolio

Orsted A/S , 7.86% ;Northland Power Inc., 7.64%; China Longyuan Power Group Corporation Limited (Class H),7.54%; EDP Renovaveis SA,7.04%; Vestas Wind Systems A/S6.36%; Boralex Inc.3.72%; Siemens Gamesa Renewable Energy, SA3.58%; Innergex Renewable Energy, Inc.,3.32%;Duke Energy Corporation,2.43%; NextEra Energy, Inc.2.34.;

According to First Trust, the sector allocation is approximately 66% Utilities and 30% Industrials.

I appreciate the firm commitment to solely wind energy related investments by the GWE index, as opposed to massive profit-generating companies that happen to have some money going towards wind energy, or even just some reasonable ESG initiatives embedded into their normal operations. At first glance, I appreciate hat I don't recognize the top 5 holdings as massive U.S. based firms. To me, this signals that Clean Edge took the time to find wind energy companies that balance profit with sustainable operations, rather than blindly jumping into an investment in a large, well-known renewable energy company (i.e. Brookfield Renewables). 

Orsted A/S is the largest energy company in Denmark. The positive catch is that their operations are entirely based on green energy, and they have built enough offshore wind to power 9.5 million people. "By 2025, our ambition is to power 30 million people with offshore wind." With every large company, no matter if their focus is renewable energy or not, comes unsustainable practices from manufacturing and transportation, to name just two examples. However, Orsted does have a fairly high ESG rating of B+ from ISS, putting them in first decile among electric utilities. I'm usually more of a skeptic in this situation, but I'm actually a supporter of FAN's largest investment. After further research and combing through potential weaknesses in Orsted's sustainability as a company, I have come up short. This either confirms that Orsted is a commendable investment, or that there are unsustainable practices waiting to be uncovered.

In researching the remaining 9 investments, I only found two notable red flags: Duke Energy and NextEra Energy. However, there is a reason these are found at the very bottom of the top ten list, and investments in these two non-renewable energy companies account for just 4% of the entire portfolio. As general energy providers, NextEra and Duke contribute heavily to carbon emissions. Realistically, for the FAN fund to be attractive and profitable, all investments can't be perfect. At least Duke and NextEr have wind energy sectors, so A+ for sticking to criteria.



How it's made:

1.5

First Trust pulls from the CleanEdge Global Wind Energy Index to curate the Global Wind Energy ETF. This index combines both active research and stock selection with passive portfolio management via an annual rebalance. CleanEdge manages four indexes specific to green energy; GWE for wind, HHO for water power, QGRD for sustainable power grid construction, and CELS as their largest and most general basket of stocks. CleanEdge has one thematic purpose as an investment manager and they execute their job well. In the GWE index, CleanEdge describes 60% of the holdings as Pure Play and 40% as diversified. In this context, pure play refers to companies where more than 50% of their revenue comes from wind power related activities, whereas diversified assets are "simply involved in the wind energy industry." I appreciate these statistics that prefer direct contribution to renewable energy, though I personally feel that the diversified holdings could be screened just a little bit more. There is no formal definition or standards for 'simple involvement' in wind energy by a company, and I am concerned that something as insignificant as a future promise to invest in renewable energy could be sufficient. 

The most promising information I found on the GWE fund is an update on the most recent additions and removals from the portfolio. CleanEdge divested from AGL, an Australian energy and gas company. AGL is Australia's largest electricity generator, and supplies a tremendous amount of revenue for FAN. However, the company was also recently named the nation's largest carbon emitter; because of this title, CleanEdge divested and reinvested into multiple renewable energy-specific companies and even a wind turbine bearings company. Way to stick to the mission!

Who makes it:

0.1

There are no listed fund managers for the First Trust Global Wind Energy ETF. I assume this blatant lack of information is explained by an assumption by CleanEdge that investors understand that the fund is passively managed with no specific managers. However, it would be helpful for this to be spelled out for those looking for quick facts about the fund.

First Trust as a company has no ESG information nor any points about sustainable practice on their website. The FAN ETF isn't even included on a list of 25 of their ETFs on their home page. I understand that investment advisory isn't the first type of company that comes to mind when looking for sustainable practices, but there's always room to at least acknowledge one of the largest growing sectors of investor interest.

CleanEdge has more of my approval for their ability to stick to truly impactful, and specifically green tech companies with their investments. But creating a general index is different than creating this specific fund, so I'm afraid their redemptive qualities cannot save the First Trust Global Wind Energy Fund. On a final note, CleanEdge discloses their managing director, Ron Pernick, who is the co-author of The Clean Tech Revolution, the first book to chronicle the growth and investment opportunity of the clean-tech market. Pernick certainly has credibility, though I'm generally disappointed with who made this fund.