Performance of renewable and non-renewable exchange-traded funds during heightened uncertainty

Abstract

ABSTRACT This study adopts a composite threshold model that differentiates between the upside and downside betas of the major US-based renewable and non-renewable exchange-traded funds (ETFs) during heightened uncertainty. It is found that downside betas for both renewable and non-renewable energy ETFs are significantly greater than upside betas. However, in a highly uncertain market, renewable energy ETFs tend to enjoy higher upside gains than the fossil-fuel ETFs. The results suggest that renewable energy ETFs have great potential to generate high returns, but the downside risk associated with renewables should be mitigated by government incentivizing the use of renewables in both domestic and foreign markets. Investing in renewable energy is not only good for the environment but also compared to other investment alternatives (including fossil fuels) it provides better risk-adjusted returns. During the last 5 years, some renewable energy ETFs have even outperformed several well-established sectoral ETFs. This paper finds that there is a more favourable business case for investing in renewables than common perception would suggest.