Launching thematic exchange-traded funds (“ETF”) with WisdomTree

Although investment sentiment in relation to fossil fuels has shifted recently, to make them somewhat fashionable again as energy security has been reprioritised, the energy transition and investment into clean energy has not slowed down. $US1.7 trillion was invested into clean energy in 2023¹, 65% more than into fossil fuels, and as the energy transition accelerates this gap will continue to widen.

A key outcome from COP28 was more policy support to pivot away from carbon intensive forms of energy, with leaders agreeing to triple renewable energy capacity by 2030. The transition to more renewable and sustainable energy sources could be the largest driver of metal demand over the coming decades. Metals like copper, nickel, aluminium, cobalt, and lithium will need to see increased levels of extraction so that the technologies required to reach the climate targets set out in the Paris Agreement can be built.

Given these tailwinds, the investment case for the energy transition is clear. There are many players in the energy value chain and huge interest from investors who are keen to capture growth in the associated sectors, be it electric vehicles or battery metals and mining. As an innovative exchange-traded fund (ETF) and exchange-traded product (ETP) issuer, WisdomTree recognises the need to offer differentiated solutions for this category and chooses to do so by collaborating with Wood Mackenzie. Together, we’ve developed five strategies across thematic equities and commodities which combine WisdomTree’s research-led product development with Wood Mackenzie’s deep understanding of the energy supply chain and extensive market knowledge.

For example, under Wood Mackenzie’s 1.5 degree scenario, electrification and renewables underpin the reduction in CO2 emissions. The 1.5 degree scenario requires an estimated $60tn of capital expenditure by 2050, with electrification requirements, utilising solar and wind, driving investment flows.

Assessment of the criticality of metals and minerals is dynamic and continuously changing, owing to economic, geopolitical, and technological factors.

Wind turbines, for example, have traditionally relied on gearboxes, but direct drive turbines are becoming more popular offshore which is likely to reduce copper intensity but increase rare earth demand. Meanwhile as solar photovoltaic manufacturers seek out efficiency gains, they are likely to increase their silver usage. With the supply shortages currently being experienced, companies involved in the energy transition metals value chain will need to play an integral role as the race to extract more crucial metals takes centre stage.

As part of its fund and index creation process, WisdomTree approached Wood Mackenzie to source quality data and insights, and to co-develop the investment frameworks of a range of proprietary energy transition strategies, which capture companies and commodities in the value chain of electric vehicles, power transmissions, charging, energy storage, solar, wind, and hydrogen production.

Our first step was to meet with the WisdomTree team to fully understand the company’s objectives, goals, and vision. This was then used as an opportunity to understand WisdomTree’s innovative approach to creating indices and ETFs/ETPs, its differences with the conventional process, and its key value levers. On this basis, Wood Mackenzie then supported through a three-step framework:

1. Identifying the most exciting trends and innovations in the energy transition space

2. Building representative exposures to the trends by taking a holistic view of the relevant value chains

3. Taking a data driven approach to assess the exposure and growth prospects of the key players (companies and commodities)

The analysis spans a wide range of companies and commodities critical to the energy transition, with a particular focus on metals and mining, power and renewables and energy storage. To address WisdomTree’s request, Wood Mackenzie leveraged its differentiated expert knowledge and capitalised on proprietary analytical tools and datasets.

We then worked with WisdomTree to integrate this data into their products to offer investors gateways into the clean tech and battery metals sectors. As the energy transition gains momentum, spurred by global commitments and regulatory advancements, these ETFs and ETPs provide refined and targeted exposure to equities and commodities essential for driving this change.

Aligning with WisdomTree’s approach to building thematic ETFs that provide pure and differentiated exposures, the selection of constituents (stocks and commodities) for the indices are informed and driven by the unrivalled expertise and market intelligence from Wood Mackenzie.