BlackRock’s clean energy ETF booked strong inflows in the first week since significant changes were made to its underlying index, a sign investors are less concerned with potential liquidity risks following the rebalance.

According to data from Ultumus, the iShares Global Clean Energy UCITS ETF (INRG) saw $253m inflows in the week to 23 April, the third-highest across all European-listed ETFs, and equivalent to almost half of its net inflows over the past three months.

Launched in July 2007, the INRG had big ambitions but an inauspicious start. Picking up support over the last year, investor interest in INRG went stratospheric following the election of US President Joe Biden with many anticipating vast clean energy infrastructure spending was on its way.

With some 42.4% of INRG’s old basket US-focused, there was some justification for these inflows and with Biden planning to have the US re-join the Paris Agreement, it appeared his presidency would be a tailwind for the global clean energy industry.

In the short term, this buoyed INRG with the ETF returning 136% in 2020. However, its rapid growth raised questions about potential liquidity issues, over-inflated valuations and over-concentrations in its basket of 30 relatively small renewable energy utility stocks. Following a series of consultations, the provider of the product’s underlying benchmark, S&P Dow Jones Indices (SPDJI), was prompted to give the Global Clean Energy index a complete overhaul. 

Changing its weighting caps, softening clean energy exposure requirements for inclusion, and most crucially broadening the basket size to 82 constituents, SPDJI completely changed the product’s risk-return and liquidity profiles.

BlackRock clean energy rebalance: An inflection point for green ETF investment?

As Kenneth Lamont, senior analyst, passive strategies, at Morningstar, told ETF Stream: “The broadening of the SPDJI index will mean ETFs tracking it will be more able to absorb the wall of money chasing this particular mega theme.

The shift in strategy and what it means for INRG’s ability to marshal more assets have already attracted more European investors to the product.

The index rebalance was not just a necessary band-aid for temporary problems, it fundamentally adjusts INRG to be suitable for mainstream popularity in the long run. However, there are fears that in diluting its clean energy exposure criteria, the ETF loses its appeal among those looking for a pure and targeted thematic play and ‘dark green’ investors who only want to back companies with clean energy as their primary source of revenue.

“The sheer volume of assets tracking this index means the broadening is necessary, but this most opens spaces for other index/ETF providers to step into the gap left and offer more niche or pureplay alternative energy exposures,” Lamont added.

Going forwards, SPDJI has already set out the possibility of battery and grid-scale energy storage picks being added in future reshuffles. For now, BlackRock’s approach will be rivalled by strategies such as the recently launched Invesco Global Clean Energy UCITS ETF (GLCE) which offers investors exposure to a basket of 141 clean energy securities, the most diversified in Europe.

It will be interesting to see whether investors agree with the trade-off between theme purity and improved liquidity and risk-return profiles. Also, given there are more than 250 unique clean energy stocks held by clean energy ETFs, did INRG need to venture outside of pure-plays to reduce concentration risks?

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