ImpactAlpha, Oct. 19 – Clean energy. Batteries. Smart grids. ESG funds and clean energy ETFs tracking elements of the climate transition took off in 2020, attracting billions of dollars from retail and institutional investors.
Investing in the climate transition is no longer just for institutions.
Such public-markets funds may have only a marginal effect on mobilizing capital for climate action. But unlike broad ESG funds that track market indexes screened for environmental, social and governance criteria, clean energy ETFs provide exposure to companies with products and services that directly address climate change.
Following a ‘Biden bump’ last year, clean-energy stocks have struggled in 2021. Still, with the cost of wind and solar now comparable to fossil fuels in many regions, clean energy stocks continue to attract retail investors.
Clean energy funds are volatile, relatively expensive and generally concentrated in a few stocks. Sectors like solar and wind are exposed to a lot of competition and regulation. In the U.S., for example, wind tax subsidies are expiring this year, and tax credits for home solar are being phased out. Nuclear power continues to be controversial. Retail investors should continue to exercise a high degree of caution when investing in renewable energy.
Diversified clean energy funds available to retail investors include the iShares Global Clean Energy ETF (ICLN), the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN), the Invesco WilderHill Clean Energy ETF (PBW), and the ALPS Clean Energy ETF (ACES).
With over $5.8 billion in assets, ICLN is the largest clean energy fund. Established in 2008, it invests in roughly 80 global companies in the biofuels, ethanol, geothermal, hydroelectric, solar, and wind industries. QCLN, which has about $2.5 billion in assets, tracks around 60 U.S.-listed clean energy and cleantech firms like Tesla, its largest holding, and lithium miner Albemarle.
The oldest clean energy ETF, PBW has a proprietary selection process to invest in U.S.-listed renewable energy and cleantech companies, including lithium miners Albemarle and Lithium Americas, Tesla, and solar panel maker First Solar. Another competitor, ACES, invests in various renewable energy and cleantech stocks like Tesla, First Solar, and the renewables-focused utility NextEra Energy.
Solar provides only 3% of U.S. electricity today, but the Energy Department believes solar could generate up to 40% of U.S. electricity by 2035 and 45% by 2050. This ramp-up would require spending as much as $562 billion.
The Invesco Solar ETF (TAN) has become the top choice for investors looking to invest in solar stocks. Despite struggling in 2021, TAN has amassed nearly $2.9 billion in assets. It invests in solar panel makers like First Solar, inverter manufacturers SolarEdge and Enphase, and residential solar panel installers such as Sunrun. There aren’t many publicly traded solar businesses, so this ETF owns only about 50 companies, mainly in the U.S., Hong Kong, and mainland China. And the top ten holdings are over 50% of the fund’s assets.
Wind energy is already around 5% of the global power generation, but capacity is projected to more than double by 2027. In fact, 2020 was the best year in history for the global wind industry as new capacity installations increased by 53%.
Although investing in wind power has been less popular than investing in solar, the First Trust Global Wind Energy ETF (FAN) has attracted nearly $400 million in assets. FAN invests in companies including the leading onshore wind turbine manufacturer Vestas Wind Systems and the Danish offshore wind developer Orsted. This fund has been volatile and concentrated in a few stocks.
From September 2021, wind power investors have another option, the Global X Wind Energy ETF (WNDY).
Electric car batteries
Switching from fossil fuel to battery-powered cars is critical in fighting climate change, but not all retail investors want to buy Tesla directly. (According to Sustainalytics, Tesla’s ESG risk score is not much better than that of Exxon Mobil, the oil major.)
A popular alternative has been to buy funds that invest in electric car batteries, which can be sold to various electric vehicle (EV) manufacturers, and lithium, the material needed to make lithium-ion batteries. Though lithium-ion batteries are also used in laptops and cell phones, in the future most lithium will likely be used for electric car batteries.
Two ETFs, the Global X Lithium & Battery Tech ETF (LIT) and the Amplify Lithium and Battery Tech ETF (BATT), invest in battery manufacturers and lithium miners. Decade-old LIT is the largest lithium ETF on the market, investing in lithium mining, refining, and battery production. It owns stocks like lithium miners Albemarle and Ganfeng Lithium, as well as EV battery-makers CATL and Warren Buffet-backed BYD. The second option is the Amplify Lithium and Battery Tech ETF (BATT), which also invests in EV car makers like Tesla and Nio.
Nuclear power has a bad rap. Nearly all large ESG funds screen out nuclear energy stocks. Yet many environmentalists, including Bill Gates, argue that we can’t get to net zero carbon without nuclear power. Several countries, notably China, are planning new nuclear reactors to address climate change.
Nuclear energy funds have taken off in 2021, fueled by the climate transition thesis. There are three U.S.-based ETFs that invest in nuclear energy, generally through stocks in uranium miners or utilities. One closed-end fund, the Sprott Physical Uranium Trust (SRUUF), buys and holds physical uranium (which retail investors can’t buy directly since uranium can also be used to make nuclear weapons).
ETFs that invest in nuclear include the Global X Uranium ETF (URA), the North Shore Global Uranium Mining ETF (URNM) and the VanEck Uranium+Nuclear Energy ETF (NLR). The Global X Uranium ETF (URA) has attracted nearly $1 billion in assets, returning 52% in 2021 year-to-date.
The U.S. electric grid is aging rapidly. The growth in renewables and the need to charge electric vehicles require a more flexible, “smarter” grid, which can accommodate intermittent supply from wind and solar and let consumers send power from home solar back into the grid.
Investors are trying to profit from this trend by buying companies that provide smart grid infrastructure. There are now two smart grid exchange-traded funds, the First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) and the SPDR S&P Kensho Intelligent Structures ETF (SIMS).
Launched in 2009, GRID tracks an index of global stocks in the electrical energy infrastructure sector. These businesses deliver electric grids, meters, networks, energy storage and management, and relevant software. SIMS is similar but focused on U.S.-listed “intelligent infrastructure” companies. In practice, these funds invest in a lot of “boring” industrial companies that could nonetheless benefit from the clean energy transition.
NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.