More investors are looking into the clean energy sector, especially the enormous investment potentials it offers. Investing in clean energy ETFs is one of the best ways to get a bite. But it is not as simple as that.
Except you are a veteran investor, you need some heads-up on alternative energy, how it can help your investment goals, and most importantly, which of these ETFs you should put your money on.
So, I have prepared this article to give you a good head start into the world of clean energy ETFs.
Key Takeaways
- Clean energy ETFs invest in stocks in the clean energy sector, including solar energy, hydroelectric energy, wind energy, and geothermal energy.
- An average of $1 trillion has been pumped into clean energy over the last four years (2016-2020) (IEA).
- The alternative energy sector is growing, and clean energy ETFs put you in an excellent position to tap the potentials.
- The seven best clean energy ETFs are ICLN, PBW, ERTH, RNRG, TAN, QCLN, and ACES.
- Consider the performance, coverage, expense ratio, and the fund’s issuer when choosing the best clean energy ETFs for your portfolio.
- You may be saving our planet with your investments in clean energy.
What Are Clean Energy ETFs?
Every exchange-traded fund (ETF) invests in stocks of one or more sectors. In the case of clean energy ETFs, they invest in stocks in the clean energy sector. Clean or alternative energy comprises solar energy, hydroelectric energy, wind energy, and geothermal energy. Companies and businesses in this sector specialize in at least one sub-sector.
The options in the clean energy market are innumerable, from the big names like Enbridge Inc. to upcoming brands like SunPower Corp. And you will agree that investing individually in all these companies and their subsectors is practically impossible. This is where ETFs come in.
Alternative energy ETFs have a pretty broad range – several businesses, sub-sectors, regions, and risk profiles. Chances are, you will find what suits your investment goals while enjoying the industry diversification that keeps your portfolio healthy.
Are Clean Energy ETFs Right For Your Portfolio?
The decision to invest in clean energy ETFs (or not) is easy to make. But you need to have the right information and perspectives to aid your decision. And these are what I will be offering in this section of the article.
According to the International Energy Agency (IEA), an average of $1 trillion has been pumped into clean energy over the last four years (2016-2020). This strongly indicates that more governments, international organizations, and even private establishments are working hard to make clean energy the new norm.
More companies and cities are setting deadlines to make their environment carbon neutral. Furthermore, 87 countries recently signed up to the Paris Climate Agreement, which aims to reduce the global warming rates to below 2 degrees by 2030. Over 800 gigawatts of renewable energy capacity must be in place over the next decade, translating to an additional $1 trillion global investment, to achieve the decarbonization goal.
All these point to the fact that the alternative energy sector is a growing sector. The “green revolution” may be closer than we imagined. Adding clean energy ETFs to your portfolio makes you a key part of the movement and puts you in a good position to tap from these enormous potentials.
7 Best Clean Energy ETFs To Buy
Having established the investment potentials of alternative energy, let me introduce you to my carefully-compiled list of best clean energy ETFs.
Let’s start with the largest clean energy ETF on this list (and in the entire market) – the iShares Global Clean Energy ETF (ICLN). Since its establishment in 2008, ICLN has amassed over $6 billion in assets. It is a global fund with a healthy geographical spread across the U.S. (39%), Denmark (16%), and Spain (6%).
ICLN tracks the index of about 80 clean energy companies spread across the wind, solar, hydroelectric, geothermal, and biofuels subsectors. The expense ratio is 0.42%, and the MSCI ESG Ratings of the funds is AAA, based on a score of 8.75/10. In 2020, ICLN returned about 140% and had been steady since then.
iShares issues ICLN.
2. Invesco Solar ETF (TAN)
The Invesco Solar ETF (TAN) is a good fit for investors who prefer solar energy stocks. Its $3 billion assets under management put it just after ICLN in size. TAN’s top three holdings include Xinyi Solar Holdings, SolarEdge Technologies, and Enphase Energy as an ETF with major allocation in solar energy stocks.
With 46 total holdings, an expense ratio of 0.69%, and an MSCI ESG rating of 6.44 out of 10, TAN is an excellent option for your portfolio, especially if you have no problems making all your clean energy investment about solar.
For more on TAN, check the issuer’s website.
3. Invesco WilderHill Clean Energy ETF (PBW)
Invesco WilderHill Clean Energy ETF (PBW) tracks the WilderHill Clean Energy Index, with holdings in clean energy and conservation stocks. It has a larger spread than ICLN, with more industrial and manufacturing focus and less pure energy plays.
However, its geographic spread is not as diverse as the previous two ETFs on the list; PBW has 86% of its holdings in the USA and 9% in China. It currently has 72 total holdings, about $2 billion in assets, and a 0.61% ratio.
4. Global X Renewable Energy Producers ETF (RNRG)
The Global X Renewable Energy Producers ETF (RNRG) fund invests in stocks of almost all subsectors of the renewable energy sector. If you want a clean energy ETF that covers solar, geothermal, biofuels, hydroelectric, and wind companies, RNRG is one of the best choices out there.
The diversification is relatively larger, with a spread across the United States, New Zealand, and Canada. Besides, RNRG’s portfolio is market-cap-weighted – there is a 6% cap on every stock. It currently has 49 total holdings, with an expense ratio of 0.65% and over 136 million total assets under management.
GlobalX ETFs issues Global X Renewable Energy Producers ETF (RNRG).
5. Invesco MSCI Sustainable Future ETF (ERTH)
Previously named the Invesco Cleantech ETF, the Invesco MSCI Sustainable Future ETF (ERTH) invests in global companies that focus on six main environmental impact themes: sustainable agriculture, pollution prevention, and control, sustainable, sustainable, water, green building, energy efficiency, and alternative energy.
The fund tracks the MSCI Global Environment Select Index, with an MSCI ESG Fund Rating of 6.55/10. It is cheaper than other entries on this list, with an expense ratio of 0.55% and $486 million total assets under management.
For more on ERTH, check out Invesco’s official website.
6. First Trust NASDAQ Clean Edge Green Energy ETF (QCLN)
The sixth entry on my list of clean energy ETFs to buy is the First Trust NASDAQ Clean Edge Green Energy ETF (QCLN). The fund tracks the NASDAQ Clean Edge Green Energy Index, including manufacturers and distributors, and installers of alternative energy technologies. Therefore, it offers a broader spread.
Currently, QCLN has $3.24 billion total assets under management. The expense ratio is 0.60, with an MSCI ESG rating of 7.14/10, indicating a solid resilience against effects of environmental, social, and governmental issues.
You should be looking at QCLN if you want a clean energy ETF with a broad portfolio that cuts across various sectors of green energy.
7. ALPS Clean Energy ETF (ACES)
ALPS Clean Energy ETF (ACES), issued by SS&C ALPS, is the final entry on this list. It tracks the North American companies that specialize in the clean energy industry. So, it offers fairly diversified exposure to the green energy ETFs, especially renewable energy and cleantech stocks in North America.
80% of the ACES’ funds go into U.S. stocks, with the other 20% in Canadian holdings. Yet, it is heavy at the top, with 50% of its assets spread around the top 10 of its 39 holdings. The total assets under ACES’ management are worth over $1 billion, and the expense ratio is 0.55%.
Buying Clean Energy ETFs – How and Where
Now that you have a list of the best global clean ETFs you can work with, let’s quickly touch on how and where to find them.
I recommend investing in your chosen clean energy ETFs using a brokerage account. Companies like Vanguard and Fidelity (the two largest issuers globally) allow you to open a trading account. Then, all you have to do is fund your account and place orders.
But before you start placing orders, understand your investment goals and how clean energy ETFs can help you achieve them. For example, are you better off investing in a single market subsector? Do you need to combine most or all sub-sectors for a balanced exposure?
Answer these and all other necessary questions before buying any clean energy ETF.
Final Verdict
The drive for climate and energy initiatives is stronger now than ever. As a result, global economies are increasingly tackling climate change and its attendant effects. And that puts energy companies with major interests in clean energy and electric vehicles in an excellent position to record a significant rise in earnings and sales.
Ready to expose your portfolio to clean energy? My list of the best clean ETFs to invest in is a great place to start. Assess every recommendation on my list based on performance, coverage, expense ratio, and the issuer to determine which fits your investment goals best. You can focus on a subsector or invest broadly across the industry – whichever works best for you.
Remember, risk management is key. And who knows, you might just be saving our planet with your investments in clean energy.
Good luck!