Trade-offs of ETFs - An Examination of Clean and Dirty Exchange Traded Funds in the Energy Sector

Abstract: The aim of this thesis is to investigate if there is a difference in performance between clean and dirty exchange traded funds (ETFs) during the examination period January 2011¬–March 2016. Dirty ETFs are defined as ETFs that allocate in non-environmentally friendly industries such as oil or coal industries. Clean ETFs are defined as ETFs that allocate in alternative energy, for example wind or solar power industries. Two portfolios consisting of clean and dirty ETFs respectively are created using a matched pair approach controlling for size and age effects. By applying the Carhart (1997) four-factor model the market, book-to-market ratio and stock price momentum are also controlled for. In addition, the performance measures Sharpe ratio, Treynor ratio and Jensen’s alpha are also employed and examined. The results suggest both that there are no statistically significant differences in performance between the clean and dirty ETF portfolios, and that the clean ETF portfolio does not perform worse than its counterpart. Different factors influence the two portfolios differently. For investors seeking ways to access opportunities in sustainable investing, the results could therefore be of much interest.