Are Energy Tokens or Gold the Best Diversifier for Clean Energy Stocks?

A key question for investors is how to diversify their clean energy stock holdings amid adverse conditions. Gold has a long history of being an effective diversifier for financial assets. Energy tokens exhibit a low correlation with clean energy stocks and may also serve as a good diversifier. This paper examines whether energy tokens or gold is the most effective diversifier for a clean energy stock portfolio. The analysis uses R2 and TVP-VAR measures of return connectedness on a dataset that includes ETFs for wind, solar, nuclear, grid connectivity, electric vehicles, gold, and two energy tokens (POWR and SNC). Network connectedness was highest at the start of the COVID-19 pandemic and during the escalation of the Russia–Ukraine war. R2 and TVP-VAR total network connectedness correlate highly (0.93). Grid connectivity is a dominant net transmitter of shocks. Gold is a dominant net receiver of shocks. POWR and SNC have low net connectedness with the other assets. Portfolio analysis reveals that, on a risk-adjusted basis, gold is a more effective diversifier than energy tokens. These results are robust across several portfolio choices (minimum variance, minimum correlation, and minimum connectedness) and representative transaction costs. For three of the four portfolios studied, a portfolio of clean energy stocks and energy tokens has lower risk-adjusted returns than one that invests only in clean energy. Minimum variance portfolios have the highest Sharpe ratios.