In a new column, investment analyst Matt Brazier, takes a closer look at the underlying investments in some of our recently reported ETF launches.
The material in this column is for information only, represents Matt’s opinions and is not designed for making investment decisions.
In the Global ETF launches column on 23rd January, in partnership with STOXX, ETF Express reported that HANetf had launched the Green Deal ETF (EUGD) in association with Societe Generale on Euronext Paris.
EUGD is designed to provide investors with exposure to companies which may benefit from the European Green Deal, approved by the European Commission in 2020.
The overarching goal of the European Green Deal is no net emissions of greenhouse gases within the EU by 2050. It has four key targets to get there:
45 per cent of energy generation from renewables by 2030
90 per cent reduction in transport emissions by 2050
Double the current rate of renovation in public and private buildings
70 per cent of waste recycled
The European Green Deal includes over EUR1 trillion worth of research and development investment according to HANetf. This represents around 7 per cent of 2021 EU GDP of EUR14.5 trillion.
As a comparison, three major pieces of legislation introduced in the US since 2021 represent a combined USD2 trillion of federal spending over the coming decade according to McKinsey & Company. The US economy is slightly larger than the EU at USD28 trillion, but the combined investment represents a similar proportion as the European Green Deal at roughly 7 per cent.
7 per cent of GDP is a sizeable investment which will have a significant impact on companies on the receiving end, and it is these companies which EUGD seeks to invest in.
EUGD includes stocks which have exposure to four policy areas identified by SG Research and which broadly correspond to the above four key targets of the European Green Deal. The four SG Research policy areas are: Clean energy, Sustainable mobility, building and renovation and the circular economy.
Stocks with a market capitalisation of under EUR500 million are excluded from EUGD and the fund currently has 50 positions.
EUGD is an equal weighted fund and so each position contributes equally to the return profile. This reduces the impact of outcomes specific to individual companies.
EUGD generally holds stocks in well established businesses which together are expected to generate a dividend yield of 2.52 per cent.
Holdings include Siemens Energy which provides conventional as well as renewable energy products, France based cable and optical fibre company Nexans SA, and water, energy and waste recycling business Veolia.
The strong representation of capital-intensive utility operators within EUGD is likely to temper returns, but also reduces the risk profile of the ETF. I counted 16 companies operating in the utilities sector within EUGD’s current holdings, roughly a third of the fund.
More broadly, achieving net zero greenhouse emissions requires huge physical capital investment which means that the companies involved are unlikely to retain a huge proportion of the funding as profit.
However, it is not simply top-down government incentives that are driving the transition. Individuals and companies are creating change via bottom-up investment. Much of this additional spending will be directed to the same businesses which stand to benefit from government cash, which bodes well for EUGD.