Bloom Energy's Russell Exit: A Watershed for Small-Cap Value Investors and Clean Energy ETFs

The removal of Bloom Energy (NYSE: BE) from the Russell 2000 Value Index in 2025 marks a pivotal moment for small-cap value investors. While the decision underscores the volatility inherent in small-cap markets, it also illuminates a broader opportunity: the shift toward thematic ETFs focused on hydrogen and clean energy. This article dissects the implications of Bloom's exclusion and outlines how investors can navigate the resulting landscape to capitalize on the energy transition.

The Mechanics of Bloom's Removal

Bloom Energy was dropped from the Russell 2000 Value Index due to its market capitalization falling below the index's threshold—estimated at $115 million as of April 2025. The Russell 2000, which tracks the smallest 2,000 companies in the Russell 3000, periodically rebalances its holdings to ensure representativeness. Companies near the cutoff face heightened risk if their valuations slip, triggering forced sales by passive index funds and ETFs.

For Bloom, this dynamic created a perfect storm. Despite reporting a 38.6% year-over-year revenue surge in Q1 2025 and narrowing operating losses, its stock price languished amid concerns over debt levels ($2.01 billion in liabilities) and the departure of CFO Dan Berenbaum. The exodus of institutional investors during rebalancing—a common outcome for removed companies—likely exacerbated volatility.

The Small-Cap Value Investor's Dilemma

The removal highlights two critical challenges for small-cap value investors:
1. Structural Liquidity Risks: Companies near the Russell 2000 cutoff face relentless pressure to grow their market caps or risk exclusion. This forces investors to balance growth potential against the risk of forced selling during rebalancing.
2. Sector-Specific Tailwinds and Headwinds: Bloom's core business—hydrogen fuel cells for data centers and industrial clients—is a growth sector. However, its operational losses and reliance on related-party transactions (noted in its footnotes) raise governance questions that deter passive investors.

The broader Russell 2000 rebalancing in 2025 also saw 242 additions and 174 deletions, amplifying turnover. This volatility underscores the need for investors to prioritize quality metrics over pure valuation screens. For instance:
- Cash Flow Stability: Bloom's $794.8 million in cash as of March 2025 offers a buffer, but its net loss ($23.8 million in Q1 2025) signals uneven profitability.
- Debt Management: High leverage remains a red flag, even within the clean energy sector.

The ETF Opportunity: Hydrogen and Clean Energy

While Bloom's exclusion poses risks for its shareholders, it opens a door for investors to rethink their exposure to the clean energy transition. Here's how:

1. Thematic ETFs Offer Diversification

ETFs like the iShares Global Clean Energy ETF (ICLN) or the First Trust Global Hydrogen ETF (HYZD) provide exposure to a basket of companies across the hydrogen and renewable energy supply chain. These funds sidestep the idiosyncratic risks of individual stocks while benefiting from macro trends:
- Hydrogen's Growth Trajectory: Global hydrogen investment is projected to hit $100 billion annually by 2030, driven by decarbonization mandates and corporate commitments.
- Portfolio Resilience: ETFs mitigate the liquidity and governance risks of small-cap stocks, offering smoother performance through rebalancing cycles.

2. Focus on Scalable, Profitable Players

Investors should prioritize companies with:
- Proven Revenue Models: Unlike Bloom, firms like Plug Power (PLUG) or Ballard Power (BLDP) have established partnerships (e.g., with Walmart and Amazon) and clearer paths to profitability.
- Government Backing: The U.S. Inflation Reduction Act's clean energy tax credits and global hydrogen subsidies create tailwinds for scalable players.

3. Leverage Sector-Specific ETFs

• Pure-Play Hydrogen Funds: The HYZD ETF holds names like Bloom Energy, Plug Power, and Hydrogenious LOHC, providing direct exposure to fuel cell innovation.
• Broad Clean Energy ETFs: The ICLN ETF includes solar, wind, and battery firms, offering diversification beyond hydrogen.

Conclusion: A Strategic Pivot

Bloom's removal from the Russell 2000 Value Index is a cautionary tale for small-cap investors. While the company's long-term prospects in hydrogen remain promising, its exclusion underscores the fragility of small-cap valuations and the importance of passive fund dynamics.

For investors seeking exposure to the clean energy transition, thematic ETFs offer a superior risk-reward proposition. By avoiding single-stock idiosyncrasies and capitalizing on sector-wide momentum, these instruments align with the energy transition's inevitability.

In short: Think themes, not stocks—especially when navigating the choppy waters of small-cap value investing.

Note: Always conduct due diligence and consider your risk tolerance before making investment decisions.