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Why Is the First Trust EIP Carbon Impact ETF Faltering?

The First Trust EIP Carbon Impact ETF tracks energy companies seeking to reduce their carbon footprint, as global economies shift from fossil fuels. Among the fund’s top holdings are natural gas providers that have announced the goal of hitting net-zero emissions by 2050.

  • First Trust EIP Carbon Impact ETF is down 5.7% year-to-date.
  • Top holding DT Midstream was one of the first midstream businesses to identify net-zero emissions goals.
  • Low-carbon energy investment was worth $1.1trn last year, says BloombergNEF.

The First Trust EIP Carbon Impact ETF [ECLN] has slipped 2.4% in the last week, and tumbled 5.7% year-to-date.

The fund’s lacklustre performance could be tied to the share price of its top holding, natural gas operator DT Midstream [DTM], which is flat and up 0.5% over the respective periods.

The share price of ECLN’s next-biggest holding, US public utility company Sempra [SRE], is down 2.3% in the last week and down 4% year-to-date. However, a project to deliver carbon-neutral e-natural gas could revive its fortunes.

The ECLN fund covers the energy sector, including companies supplying natural gas and electricity.

The fund focuses on firms reducing greenhouse-gas emissions within their operations and the wider market, by decreasing reliance on fossil fuels and steering towards renewable power. First Trust stipulates a minimum 80% of ECLN’s net assets be directed towards companies identified as demonstrating or aiming for a “positive carbon impact”.

As of 22 September, electrical power and transmission accounts for 66% of the fund’s sector exposure, followed by natural gas transmission (24.6%), natural gas gathering and processing (6.1%) and petroleum product transmission (2.3%).

E-natural gas project for Sempra

The US dollar is ECLN’s largest holding with a 10.4% weighting as of 22 September. Its top stock holding is natural gas pipeline operator and developer DT Midstream, with a 5.5% weighting. DT Midstream was one of the first midstream businesses to identify net-zero emissions goals. The company is working to achieve that target by 2050, and to reduce emissions by 30% before 2030 (in comparison to 2021 levels), according to its 2023 sustainability report.

DT Midstream reported “strong” second-quarter (Q2) 2023 earnings in early August, announcing net income of $91m, up from $81m in Q1. Adjusted EBITDA of $224m was just below the $225m recorded in Q1.

The company’s stock price fell 2.8% on 1 August, the day it announced earnings.

The second-largest stock holding in ECLN’s portfolio is US public utility company Sempra [SRE], with a 3.9% share. On 11 September, Sempra announced a potential project on the US Gulf Coast, which could lead to “an international supply chain of liquefied e-natural gas”, supplying 130,000 tons annually, and strengthening US energy security.

Sempra says e-natural gas is “likely to be considered carbon neutral” as it can be made using hydrogen powered by renewables and captured carbon.

With a network of nearly 40 million customers, in 2021 Sempra announced it would aim to reach net-zero greenhouse gas emissions by 2050.

Low-carbon spending soaring

ECLN focuses on energy companies committed to reducing their carbon footprint and pivoting to renewables. While termed a ‘sustainable fund’, it offers exposure to firms still invested in fossil fuels.

However, some experts believe directing money to companies planning to transition is better than cutting them out. “All the heavy polluters need to either change their business model or go out of business, but you are not achieving that by opening a portfolio that consists of tech stocks and financials,” Tom Steffen, Researcher at sustainable investment management company Osmosis, told Energy Monitor last year.

A report from the International Energy Agency estimates that £2.8trn will be invested in energy in 2023, with $1.7trn funnelled towards clean energy technologies including renewable power. According to the report, for every $1 directed towards fossil fuels, $1.70 is spent on clean energy, up on a 1:1 ratio five years ago.

January analysis by BloombergNEF says the low-carbon energy transition attracted a record $1.1trn of investment last year.

At TipRanks, the First Trust EIP Carbon Impact ETF is rated a ‘modest buy’ based on a consensus of 53 analysts. An average 12-month price target of $27.37 is 14.3% above the close of $23.95 on 22 September.

The consensus among 19 analysts at CNN Business is to ‘buy’ Sempra stock. Among nine analysts, the consensus is ‘outperform’ on DT Midstream shares.

Disclaimer Past performance is not a reliable indicator of future results.

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