It's common for market participants to look at electoral politics through a sectoral lens and the 2020 election cycle is no different.
In the run up to Election Day, the conventional wisdom, prosaic as it may be, is that if President Trump scores an upset, aerospace and defense, traditional energy and financial services equities would benefit. Conversely, if former Vice President Joe Biden wins, expectations are that technology and alternative energy stocks, among others, will surge.
Now 12 and a half years old, the $2.03 billion, ICLN follows the S&P Global Clean Energy Index. As of Oct. 21, nearly half of that benchmark's 2020 gains were accrued over the prior 30 days, suggesting ICLN and comparable exchange traded funds are levered to the idea of Biden victory and blue wave – Democrats winning the Senate and maintaining their House majority.
Politics Help, But Aren't the Only Factor
In case of ETFs such as ICLN and those funds' holdings, a frequently cited view is that a blue wave will be efficacious for clean energy stocks because Biden is promising an ambitious agenda on this front, calling for $2 trillion in related investments. If a blue wave comes to pass, Democrats will have carte blanche to spend to their hearts content, theoretically bringing a boost for ICLN and friends.
However, investors shouldn't rely heavily on national electoral outcomes when it comes making decisions about renewable energy assets. As the chart below indicates, ICLN has been a dominant performer over the past three years while the fossil fuel-heavy Energy Select Sector SPDR (XLE) has been dreadful. All that while President Trump is in the Oval Office.
Believe it or not, Biden winning could actually open the door to a sell the news event for ICLN and other renewable energy assets because that event is largely priced into these assets at this point. That and it's also worth remembering a Democrat in the White House isn't a guarantee of clean energy equity success. From January 2009 through Election Day 2016, the time President Obama was in office, ICLN lost 54.4 percent while the aforementioned XLE gained almost 57 percent.
Conversely, traditional energy is the only sector sporting negative returns since Trump took office. In fact, a case can be made that investors can embrace an alternative energy ETF regardless of what happens on Election Day for multiple reasons. First, many decisions regarding clean energy adoption are made by corporations and states and aren't dictated by the federal government.
Second, renewable energy adoption isn't a US-only story. Far from it. Europe is one of the biggest drivers in this market and developing economies, including China and India, have ambitious pollution reduction plans of their own.
Adding to the case for ICLN are shifting attitudes toward renewable energy investing, a theme that's been manifesting before it became clear whom the Democrats were going to nominate.
“A significant shift in investor sentiment toward renewables already took place earlier this year when the collective market cap of clean energy stocks surpassed that of oil giant ExxonMobil,” notes U.S. Global Investors. “The clean energy group—which includes companies like Vestas Wind Systems, Plug Power, Sunrun and Siemens Gamesa Renewable Energy (GCTAF)—is now valued at just under $200 billion, compared to Exxon at $145 billion.”
At the end of the day, the results of one election can impact the ICLN thesis, but the effects will likely be short-term. It's clear energy adoption and consumption is being disrupted and that's a longer-ranging theme, confirming the ETF can deliver regardless of White House occupant.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.