Portfolio Diversification Opportunities in Traditional Energy and Alternative/Renewable Energy ETF Segments

Abstract

Article history: Received: April 8, 2024; Reviewed: May 31, 2024; Accepted: June 21, 2024; Available online: June 30, 2024. This study evaluates the diversification benefits of investing in traditional and alternative/renewable energy Exchange Traded Funds (ETFs) using the VAR-ADCC-GARCH model to analyze yields, correlations, and volatilities. The results demonstrate that alternative/renewable energy ETFs not only offer higher average returns but also significantly reduce portfolio risk compared to traditional energy ETFs. The research underscores the distinct investment dynamics between the two ETF segments, highlighting the advantages of incorporating renewable energy assets into diversified portfolios. These findings support the inclusion of environmentally-conscious investment strategies that effectively balance risk and return, emphasizing their importance for investors aiming to optimize their portfolios in line with sustainable practices. JEL classification: G11, C58, A100, A110

Keywords

• portfolio diversification
• ETFs
• traditional energy
• renewable energy
• VAR-ADCC-GARCH Model