The World Needs Options, COP27 and Energy Exposure in your Portfolio

This week COP27 takes place in Sharm El-Sheikh, Egypt. This annual event, the “Conference of the Parties” or “COP” brings together the governments which have signed the United Nations Framework Convention on Climate Change (UNFCCC), the Kyoto Protocol or the Paris Agreement. World leaders, ministers, and negotiators come together to agree on how to jointly address climate change and its impacts. In this spirit, I’m looking at different ways to address investment options and energy exposure in your portfolio.

In our examples, we are considering two key periods since COP21 (the Paris agreement – Nov. 30 to Dec. 12 2015) for investment in the energy sector and five exchange-traded funds (ETF’s). The pre-COVID period until Feb. 28 2020 when the global equity markets first started to price in some of the contagion risks. The period since COVID started to get priced into markets and covers the period of negative crude oil prices that started on April. 20 2020. The interesting outcome of this analysis is that no matter what exposure you had since COP21, you made no money owning the (traditional) energy sector until 2022. All the money made, has been made this year, and it seems that it’s mostly related to the rebalancing of the world energy supply chains since Russia invaded Ukraine. Many will tell you it’s underinvestment in the sector and to some extent this is probably very true. But the future on the world’s energy consumption is very clear to me. It’s clean energy. But make no mistake, traditional energy consumption will be massive for decades.

For now, the noise in the market is clearly focused on the traditional energy story with the U.S. mid-term elections tilting to the grand old party (GOP) likely to see the climate friendly democratic agenda get pushed to the back burner possibly well beyond the 2024 presidential election. For 2022 only, looking at past returns of clean energy and transitional energy like uranium compared to traditional energy, you get a very different picture. But looking at the post Russian invasion is missing the big picture. The world is transitioning to clean energy, and while you may or may not believe we need to do it, the world is moving in that direction and what I think we need is a way for investors to track that trend.

I’ve been advocating for a energy based ETF that would use an active covered call strategy to invest in both traditional energy and clean energy. There is good volatility in both these areas. And for this strategy to migrate from old to new over time to track the progress the world is making in this direction. The truth is that both sources of energy are needed. Just look at the decisions Germany has made in the past decade to move off nuclear and adopt a strong green agenda only now to be burning more coal than ever since the war caused the geopolitical landscape to change dramatically. We need thoughtful policy on energy transition and not exclusiveness of one versus the other. It would be great to see investment solutions that understood this obvious need as well.

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