These seven green ETFs to buy now all look attractive at current levels.
Climate change, sky-high oil prices and the ever-increasing pace of technological advancement have spurred recent investor interest in the clean energy and renewables industry. This sector primarily encompasses companies that are involved in the production and distribution of solar, wind, hydroelectric or geothermal energy. Much like the gold rush of the 1800s, the clean energy boom is nascent and emerging. There really is no way of knowing which companies will soar to become the next industry titan like Exxon Mobil Corp. (ticker: XOM), or crash to become the next Enron scandal. Instead of picking individual stocks, a less risky way to invest in the sector is by buying an exchange-traded fund, or ETF. Here’s a list of the seven best low-cost clean energy ETFs to buy for 2022.
iShares Global Clean Energy ETF (ICLN)
Up first is the iShares Global Clean Energy ETF. With $5.6 billion in assets under management, or AUM, this ETF is currently the largest in its thematic category. With 76 holdings from around the world, ICLN does an excellent job of tracking companies involved in the biofuels, ethanol, geothermal, hydroelectric, solar and wind industries. As a bonus, ICLN also holds companies that develop the technology and equipment used by the clean energy sector. ICLN mostly tracks mid-cap companies, and the fund’s price-book ratio sits at 2.88, boasting a modest price-earnings ratio of around 25. ICLN currently costs a management expense ratio, or MER, of 0.42% to hold, which is pricy compared to passive index funds, but not atypical for a specialized thematic fund.
Invesco Solar ETF (TAN)
Investors looking for a pure solar energy play should consider buying the Invesco Solar ETF. TAN is a riskier play than ICLN, as it has more concentration risk because of its narrow focus. The result is more volatility with the potential for higher returns. This fund holds several different categories, including solar technology development, solar materials production, solar installers and financing, and solar equipment manufacturers. TAN tracks both pure-play and medium-play solar companies, with the former having solar as their primary business line and the latter having solar as no more than one-third of their revenue. TAN currently has a total of 52 underlying holdings, AUM of $2.7 billion and an MER of 0.66%.
Direxion Daily Global Clean Energy Bull 2x Shares (KLNE)
Are you highly bullish on the future of clean energy and willing to accept more risk for greater returns? Consider buying a leveraged ETF like Direxion Daily Global Clean Energy Bull 2x Shares. KLNE aims to deliver two times the daily returns of its underlying stocks, which include companies involved in the biofuels, ethanol, geothermal, hydroelectric, solar and wind industries. The key word here is “daily.” While the returns of KLNE might be two times that of its holdings daily, the mathematics behind compounding could cause its long-term results to vary wildly. In a bear or sideways market with high volatility, KLNE could significantly underperform its unleveraged counterparts due to a phenomenon called beta slippage. KLNE uses derivatives called swaps to achieve this leverage, and that doesn’t come cheap. The ETF has a high MER of 1.29%, which is nearly three times that of unleveraged funds. KLNE is best recommended for experienced investors with a strong thesis and short holding period.
Global X Solar ETF (RAYS)
Like TAN, the Global X Solar ETF also offers exposure to companies involved in the solar energy industry. Unlike TAN, however, RAYS uses a proprietary natural language processing algorithm to select its holdings. This algorithm identifies and ranks potential stocks based on their public disclosures to ensure that at least 50% of their revenues come from solar. Further, RAYS applies an environmental, social and governance, or ESG, screener to weed out companies with labor, human rights and pollution issues. Finally, RAYS imposes an 8% weight on each underlying holding to ensure no stock can grow so large as to dominate the ETF. Despite all the active management, RAYS is surprisingly cheaper than TAN with an MER of 0.5%. However, the AUM is rather small at just more than $10 million, so expect a larger bid-ask spread when buying due to the lower volume and interest.
SPDR S&P Kensho Clean Power ETF (CNRG)
While the previous ETFs focused on global clean energy companies, the SPDR S&P Kensho Clean Power ETF has a decidedly U.S.-based focus. CNRG holds 45 U.S.-listed stocks that either manufacture clean energy technology or offer clean energy products and services. CNRG further categorizes its holdings into “core” or “non-core” buckets, depending on whether the companies held make clean energy their primary business activity or not. Companies that are deemed to be “core” are overweighted relative to “non-core” equities to ensure more representative sector exposure for investors. The fund is rebalanced annually to ensure the overall weightings remain appropriate. CNRG has decent AUM at $294 million, and currently charges an MER of 0.45%.
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)
The First Trust Nasdaq Clean Edge Green Energy Index Fund also focuses on U.S. companies involved in the clean energy sector. Unlike some of the previous funds, however, QCLN is passively managed. QCLN tracks the Nasdaq Clean Edge Green Energy Index instead of using an algorithm to manage its holdings. The weightings of the ETF’s 65 underlying holdings are therefore held according to their market cap weights, and not based on a screening formula. QCLN’s index tracks Nasdaq-listed stocks from across four clean energy subsectors: advanced materials, energy intelligence, storage and conversion, and renewable generation. The ETF currently has $2.8 billion in AUM and costs an MER of 0.6%.
First Trust Global Wind Energy ETF (FAN)
Last up on the list is the First Trust Global Wind Energy ETF. FAN offers exposure to 53 global companies involved in the wind subsector of the clean energy sector. Like TAN, FAN allocates its holdings using a pure-play versus diversified sector screening criteria. That means that 60% of the 53 underlying stocks must be primarily involved in the wind industry, while the remaining 40% are companies that have some but not all their business in the wind industry. FAN also puts an 8% cap on the weights of the top five pure-play wind companies, and a 2% cap on all diversified sector companies. The purpose of this cap is to protect investors from the possibility of one large holding influencing the ETF excessively. FAN has attracted $347 million in AUM and currently charges an MER of 0.6%.
7 best clean energy ETFs to buy now:
— iShares Global Clean Energy ETF (ICLN)
— Invesco Solar ETF (TAN)
— Direxion Daily Global Clean Energy Bull 2x Shares (KLNE)
— Global X Solar ETF (RAYS)
— SPDR S&P Kensho Clean Power ETF (CNRG)
— First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)
— First Trust Global Wind Energy ETF (FAN)
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7 Clean Energy ETFs to Buy Now originally appeared on usnews.com
Update 03/23/22: This story was published at an earlier date and has been updated with new information.
