ERTH: Holding Up Well Despite Tesla Tanking (NYSEARCA:ERTH)

Introduction

The Invesco MSCI Sustainable Future ETF (NYSEARCA:ERTH) is a unique exchange-traded fund (“ETF”) with a wide range of holdings focused on sustainable operations and technologies. Some perhaps unexpected top-10 holdings include net-zero focused data center real estate investment trust (“REIT”) Digital Realty (DLR), animal waste renderers Darling Ingredients (DAR), and Japan’s largest publicly-listed railway JR Central (OTCPK:CJPRY). However, the major risk point was holdings of highly valued electric vehicle (“EV”) companies such as Tesla (TSLA) and NIO (NIO), and both assets have fallen by over 60% the past year.

Thankfully, the diversification across a wide range of global assets has prevented the ETF from trading down over 60%. See my prior article for a more detailed breakdown. This article will highlight the major trading patterns over the past year, and lay out my expectations for the year to come.

1-Year Performance Summary

ERTH is down 27.8% over the past year while SPY is down 19%. However, ERTH is performing in line with the similarly composed VanEck Vectors Low Carbon Energy ETF (SMOG). The fund also outperformed EV sector-focused funds such as the iShares Self-driving EV and Tech ETF (IDRV), particularly thanks to strong performance of solar energy and utility assets, as represented by the iShares S&P Global Clean Energy Index ETF (ICLN).

All tickers are facing significant downward momentum, and I expect this to continue in the early parts of 2023. However, as I discuss next, there are a few catalysts that may allow ERTH to have unique outperformance by the end of the year. In fact, the fund may even end positive, so I suggest that investors should consider dollar cost averaging now if they have not done so.

2022 Saw Growth vs Value

Some of the top holdings in late 2021 were growth holdings that had shot up significantly due to stimulus and the green energy frenzy. However, what goes up must come down and weakness over the past year has caused the high value names to sell off. In fact, Tesla used to be the second largest holding, but is now 7th. Also, NIO has fallen from fourth to eighth. At the same time, value oriented names such as Vestas (OTCPK:VWDRY) and JR Central have risen places as their selloffs have been shallower over the past year. Solar names such as SolarEdge (SEDG) and Enphase (ENPH) have held on well over the past year and remain top holdings.

Moving forward, I expect value names to remain the outperformers. In fact, JR Central is one of my top picks for 2023. The problem is that this may not correlate to positive returns after a 1.5 year bear run. Growth remains weak, and value names are facing recessionary risks. Despite this, I believe that the fund may turn positive for the year, especially after my S&P 500 Index (SP500) analysis that suggests next year will end positive. The key will be if certain catalysts allow for ERTH’s holdings to return to positive momentum.

Foreign Exchange

Notice something about the top 10 holdings? Many are foreign companies. Combined with a strong dollar in 2022, this is one reason why performance has been poor over the past year. However, over the past 2-3 months, the dollar has weakened, but has room to continue to do so. This will be a single catalyst for approximately 10% positive momentum from foreign exchange benefits alone. I hope investors heeded my advice on loading up on foreign assets back in October.

To reap rewards, the U.S. economy will need to weaken and interest rates will need to fall. Positive inflation data over the past few months has been one reason for the dollar weakness of late, and if the Fed becomes dovish once again, then investors will continue selling off their USD currency. Value and low-risk focused currencies such as the Japanese Yen and the Euro will be prime candidates for a rebound. This means JR Central, Alstom (OTCPK:ALSMY), Umicore (OTCPK:UMICY), EDP Renewables (OTCPK:EDRVF), and others will all have positive catalysts over the next few quarters.

If the dollar remains strong, these same foreign companies that also have operations in the U.S. will see outperformance compared to peers as the stronger currency can be reinvested in operations or returned to shareholders. One of the prime candidates may be Digital Realty, especially with their secular growth industry. I expect this will be the case over the next few months, and the catalyst will be quite important as European companies face economic weakness at home. The offset may not be complete, but should be enough to reduce the risk of downside next year significantly.

Conclusion

ERTH continues to offer investors a complex, well-diversified ETF full of sustainable technology companies. While I expect continued weakness in the growth-oriented holdings, there are significant blend-value holdings to offset the downside. While all companies are facing economic stagnation headwinds, particularly negative investor sentiment, fundamentals remain strong suggesting there may be a rebound over the next twelve months. As it is an ETF, I do not expect significant trading opportunities for Invesco MSCI Sustainable Future ETF, but I believe loading up on shares during this weak phase would be profitable in the long run.

Other catalysts include the IRA which includes significant stimulus for the sustainable tech industry. However, many companies are postponing projects until 2023 when tax impacts and regulations are fully understood. This may support the bearish trend into early 2023, but allow for a rebound in financial performance for the group into year end 2023.

I will continue to accumulate Invesco MSCI Sustainable Future ETF on a long-term basis from this point. Plus, the ERTH ETF is a great candidate to accumulate on a regular basis over a long period, so I would recommend that for investors not looking to time the market.

Thanks for reading. Feel free to share your thoughts and expectations.