Energy ETF Performance : The Role of Fossil Fuels

The Principles for Responsible Investment (PRI) affected the financial markets since the year 2000. Asset managers and investors consider Exchange Traded Funds (ETFs) as a popular investment vehicle which represents a source of growth for sustainable strategies. Clean Energy ETFs (CE ETF) are funds that invest in stocks of alternative energy sectors as solar energy, wind, hydroelectric and geothermal companies. In 2022, CE ETF have recorded a rate of return equal to 3.3% in a quarter. The increasing interest by policy makers and investors in sustainable finance fostered the development of new classes of green assets. In this context, it is important to analyze the role sustainable ETFs may play to build portfolio strategies. The aim of this paper is to investigate the features of the most capitalized ETFs over the last decade (2012-2022) distinguishing between CE ETFs and Fossil Fuels ETFs (FF ETFs). Using daily quotes, we build minimum variance portfolios composed of only CE ETFs, Mixed Energy ETFs, and FF ETFs. Computing the Sharpe and the Sortino ratios, we show that the CE ETFs portfolio does not always provide a better risk-return trade off, but it often beats the FF one. Given the time-varying features of the volatility of ETFs returns, we use a GARCH framework and analyze the various portfolios’ performance in different sub-periods, to take into account the pandemic crisis, the Paris Agreement, the Ukranian conflict. We find that portfolios’ performance is highly affected by i) the market condition, and ii) the investors attention to sustainability. Moreover, the exclusion of fossil fuels ETFs does not deteriorate the profitability