Top 3 Clean Energy ETFs to Consider

The effects of global climate change on the environment are becoming more and more pronounced—glaciers are shrinking, the layer of ice on rivers is thinning, heat waves are intensifying, and the frequency and severity of droughts and storms is rising. The pressing issues of climate change and environmental concerns, many of which are due to the greenhouse gas (GHG) emissions, have brought to the fore the damage done by use of fossils over the century. In this backdrop, clean energy emerges as a viable alternative to traditional sources of energy and thus a mechanism for damage control.

Here’s a look at some investing opportunities in the clean energy space primarily via exchange traded funds (ETFs).

Clean energy is defined by NCSEA as the energy derived from renewable, zero-emissions sources (renewables), as well as energy saved through energy efficiency measures. The terms renewable energy and clean energy are interchangeably used.

For years, fossil fuels have played a significant role in industrialization and advancement of countries worldwide as the primary source of energy. However, they have also added to pollution and toxins to all components of the environment. Despite the ill-effects of its usage, and rising awareness, the shift to renewable sources isn’t easy although it is vital for global efforts being made to reach carbon neutrality.

The concerns about climate change brought countries across the globe together to sign the Paris Agreement in December 2015, which aims to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels. There is a gradual rise in consciousness amongst consumers, companies, and governments about carbon footprint. According to a 2020 study by Deloitte, 53% of all residential respondents indicated that it is very important to them that part of their electricity supply comes from renewable sources while 51% of business respondents are working to procure more electricity from renewable sources.

In the U.S., the Biden administration has already begun to execute its plan to “put the United States on an irreversible path to achieve net-zero emissions, economy-wide, by no later than 2050,” which includes re-entering the Paris Agreement, investing $2 trillion in clean energy, and fully decarbonizing the power sector by 2035. In April 2021, President Biden announced a new target for the U.S. to “achieve a 50-52% reduction from 2005 levels in economy-wide net greenhouse gas pollution in 2030—building on progress to-date and by positioning American workers and industry to tackle the climate crisis.”

In 2020, when consumption for all fuels broadly declined, there was an increase in the demand for renewables as a source of energy. According to a report by the International Energy Agency (IEA), “renewable sources of electricity such as wind and solar grew at their fastest rate in two decades in 2020 and are set to expand in the coming years at a much faster pace than prior to the pandemic.”

The International Renewable Energy Agency (IRENA), under its Transforming Energy Scenario, estimates that there would be 70% cut of the world’s energy-related carbon dioxide (CO2) emissions by 2050, with 90% of this reduction achieved through renewables and energy efficiency measures. Overall, these efforts promise higher economic growth, more jobs, and improved living conditions.

Investing Opportunities Via ETFs

ETFs provide a diversified and convenient route to invest in companies in the clean energy space.

The iShares Global Clean Energy ETF (ICLN) provides an exposure to around 80 companies that produce energy from solar, wind, and other renewable sources from around the globe. The ETF diversifies the portfolio across 14 nations, with a 40% allocation to the U.S., followed by Denmark at 13.5%. Launched in 2008, it has $6.02 billion as assets under management and an expense ratio of 0.46%. The ETF tracks the S&P Global Clean Energy Index and currently has an allocation of 48.5% towards the top ten holdings, which are:

• Vestas Wind ADR (VWDRY)
• Enphase Energy (ENPH)
• Orsted ADR (DNNGY)
• Plug Power (PLUG)
• Xcel Energy (XEL)
• NextEra Energy (NEE)
• Iberdrola ADR (IBDRY)
• ENEL ADR (ENLAY)
• SolarEdge (SEDG)
• SSE ADR (SSEZY)

Launched in 2007, First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) tracks the Nasdaq Clean Edge Green Energy Index (CELS). Although CELS is a modified market capitalization weighted index, its methodology includes caps to prevent high concentrations among larger alternative energy stocks. CELS primarily consists of companies which are manufacturers, developers, distributors, or installers of clean energy technologies. In terms of sectoral allocations, it currently has a 26% of allocation towards renewable energy equipment sector and 21% in automobiles. With almost $2.65 billion as assets under management, the ETF is spread across 53 stocks with a 55% allocation in the top ten holdings, which include:

• NIO ADR (NIO)
• Tesla (TSLA)
• Enphase Energy (ENPH)
• Albemarle (ALB)
• Plug Power (PLUG)
• XPeng ADR (XPEV)
• SolarEdge (SEDG)
• Cree (CREE)
• Sunrun (SPWR)
• ON Semiconductor (ON)

Next is the Invesco WilderHill Clean Energy ETF (PBW). The fund was launched in 2005, with 90% of its portfolio in the stocks that comprise the WilderHill Clean Energy Index. The index captures businesses that may benefit “from a societal transition toward cleaner energy and decarbonization." The top three sectoral allocations—industrials, consumer discretionary, and information technology—add up to 78%. PBW has a portfolio of 68 holdings with a tilt towards mid and small cap stocks. The ETF has $2.23 billion as assets under management and an expense ratio of 0.70%. The top ten holdings have a 17.14% allocation, and they are:

• Ameresco (AMRC)
• ChargePoint (CHPT)
• XPeng ADR (XPEV)
• MYR (MYRG)
• Albemarle (ALB)
• NIO ADR (NIO)
• First Solar (FSLR)
• Workhorse (WKHS)
• Livent (LTHM)
• TPI Composites (TPIC)

Other ETFs

In addition to providing a holistic exposure to renewables, some ETFs focus on wind or solar energy. Overall, some of the other ETFs which offer exposure to clean energy are:

• Alps Clean Energy ETF (ACES)
• Invesco Global Clean Energy ETF (PBD)
• SPDR S&P Kensho Clean Power ETF (CNRG)
• VanEck Vectors Low Carbon Energy ETF (SMOG)
• First Trust Global Wind Energy Index Fund ETF (FAN)
• Global X YieldCo & Renewable Energy Income ETF (YLCO)

Disclaimer: Information on funds based on factsheets. Data as on sectoral weightage, top constituents, and assets as of June 24, 2021, and is subject to change. The author has no position in the index or stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in it are totally unintentional.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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