The Efficiency of Alternative and Conventional Energy Exchange-Traded Funds: Are Clean Energy Exchange-Traded Funds a Safer Asset?

Abstract

This paper examines the efficiency of alternative energy equity Exchange-Traded Funds (ETFs) and conventional energy equity ETFs from 2018 to 2020, utilizing a combination of an output-oriented Slack-Based Data Envelopment Analysis (DEA) model and cluster analysis. In the context of an output-oriented DEA model, efficiency is defined as the ability of an ETF to maximize its outputs (annualized average return; environmental, social responsibility, and corporate governance; and net asset value) given a fixed level of inputs (expense ratio and beta). The findings indicate that alternative energy ETFs have the potential for long-term outperformance compared to conventional energy ETFs in terms of efficiency. However, during financial crises, the performance differences between the two types of ETFs diminish, with no significant outperformance observed in either category. The expense ratio and net asset value are identified as key factors influencing the efficiency of both ETF types. Additionally, social and governance metrics have a notably stronger positive impact on conventional energy ETFs relative to alternative energy ETFs, highlighting the increasing significance of these factors in financial asset performance.

Keywords

• exchange-traded funds
• energy
• slack-based data envelopment analysis
• cluster analysis
• COVID-19