The top clean energy ETFs to buy now.
President Joe Biden signed into law the Inflation Reduction Act on Aug. 16. Of particular interest is its strong climate focus, which includes the expansion of tax credits for wind, solar, nuclear, clean hydrogen, clean fuels, energy-efficient commercial buildings, new energy-efficient homes and electric vehicle, or EV, infrastructure. The act was designed to incentivize a shift in the American industrial, manufacturing and technology sectors to a renewable energy focus. Central to this was a “make it in America” provision that incentivizes the use of domestic equipment and unionized labor for clean energy production. The law’s passage might create tail winds for clean energy stocks, which have suffered during the rising-rate, high-inflation environment of 2022. Thanks to the IRA, the clean energy industry is once again having its day in the spotlight. Here’s a list of the seven best clean energy exchange-traded funds, or ETFs, to buy for future growth.
iShares Global Clean Energy ETF (ticker: ICLN)
For a broad bet on the clean energy industry, ICLN is ideal, given that it tracks the S&P Global Clean Energy Index. The ETF offers a high level of diversification: It holds stocks from around the world and from multiple clean energy industries, including biofuels, ethanol, geothermal, hydroelectric, solar, wind, semiconductor equipment, renewable electricity, electric utilities and electrical equipment. Clean energy investors have liked ICLN so far, with the ETF recording high inflows and now sporting roughly $5.4 billion in assets under management, or AUM. The fund’s annualized average return since inception is a 4.8% loss, but this is understandable given that it debuted during the peak of the 2008 financial crisis, when energy prices were through the roof. Its 10-year average annualized return is much better, at 12.6%. In terms of fees, ICLN has an expense ratio of 0.40%.
Invesco WilderHill Clean Energy ETF (PBW)
PBW is Invesco’s equivalent to ICLN, but with a U.S.-only focus. The ETF tracks the WilderHill Clean Energy Index, which comprises 82 U.S. companies involved in cleaner energy and conservation. The ETF is heavily weighted toward small-cap stocks, with 40% of the fund in small-cap growth stocks, 17.8% in small-cap blend and 9.6% in small-cap value. This gives PBW higher volatility and risk, but also the potential for higher returns. Over the last 10 years, PBW has posted an 11.4% average annualized return, but has experienced many boom-and-bust periods, the most recent being its run-up from March 2020 to January 2021 that saw the ETF more than quadruple in share price. PBW costs an expense ratio of 0.62%.
ALPS Clean Energy ETF (ACES)
Investors bullish on the North American clean energy industry can buy ACES, which tracks the CIBC Atlas Clean Energy Index. This index holds a portfolio of U.S. and Canadian companies involved in renewable and clean technology development, production and sales. Nearly 18% of the ETF is held in U.S. stocks, with 18% in Canadian stocks. The ETF is benchmarked to the S&P 1000 index, which tracks the small- to mid-cap segment of the U.S. market. Breaking ACES down in terms of industry, most underlying companies are in solar (28.8%), with EVs (24.8%) and wind (19.3%) being a secondary and tertiary focus. In terms of fees, ACES costs a 0.55% expense ratio. Since its inception in June 2018, ACES has posted an average annualized return of 19.5%.
Invesco Solar ETF (TAN)
Investors looking for a more concentrated bet on a particular sub-industry of the clean energy industry can opt for TAN if they’re bullish on solar. This ETF tracks the MAC Global Solar Energy Index (SUNIDX), which is composed of 55 solar technology development, solar materials production, solar installation and financing and solar equipment companies. With $2.8 billion in AUM, TAN is the most popular solar-focused ETF on the market. The ETF selects its holdings by categorizing them as either pure-play or medium-play. Pure-play solar stocks are those with solar revenues that make up a majority of their business, while medium-play stocks have solar revenues accounting for one-third or less. The ETF costs an expense ratio of 0.66% and has an average annualized return of 18.9% over the trailing 10 years.
First Trust Global Wind Energy ETF (FAN)
If the ETF of choice for solar investors is TAN, then for wind investors it must be FAN. This ETF tracks the ISE Clean Edge Global Wind Energy Index, which holds 52 global companies involved in the wind energy generation, equipment and services industries. Like TAN, FAN also screens its holdings based on their degree of wind industry exposure, categorizing companies as either pure plays or diversified. The former must have at least 50% of its revenue come from wind sources, while the latter can have just incidental exposure to wind. The ETF then overweights pure-play companies at 60% of its underlying holdings, while capping each diversified company at no more than 2%. FAN charges an expense ratio of 0.60%.
First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)
Another option for U.S.-focused investors is QCLN, which tracks the Nasdaq Clean Edge Green Energy Index. This index comprises 61 U.S. stocks involved in four clean energy sub-industries: advanced materials, energy intelligence, storage and conversion, and renewable generation. Another criterion is that the holdings must be traded on the Nasdaq exchange, known for its heavy representation of up-and-coming technology companies. QCLN is dominated by the renewable energy equipment segment (29.5%) industry, with the next-largest segments being EVs (16.2%) and semiconductors (15.6%). Notable stocks include Tesla Inc. (TSLA) at 7.7% and Nio Inc. (NIO) at 6.8%. The ETF charges an expense ratio of 0.58% and has returned 22.6% annualized over the trailing 10 years.
Direxion Daily Global Clean Energy Bull 2x Shares (KLNE)
The last ETF on this list is intended for day and swing traders due to its high level of risk. As a leveraged ETF, KLNE offers two times daily exposure to the returns of its underlying index, the S&P Global Clean Energy Index. This index tracks 100 global stocks from the biofuels, ethanol, geothermal, hydroelectric, solar and wind industries. If this index returns 1% in a day, KLNE will return 2%. Conversely, if the index falls 1% in a day, KLNE will lose 2%. Due to how compounding works, the long-term performance of KLNE can differ wildly from its daily leverage target, a phenomenon called “volatility decay.” Thus, KLNE is not intended to be held long term. The ETF also charges a high expense ratio of 1.29%.
7 best clean energy ETFs to buy now:
— iShares Global Clean Energy ETF (ICLN)
— Invesco WilderHill Clean Energy ETF (PBW)
— ALPS Clean Energy ETF (ACES)
— Invesco Solar ETF (TAN)
— First Trust Global Wind Energy ETF (FAN)
— First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)
— Direxion Daily Global Clean Energy Bull 2x Shares (KLNE)
More from U.S. News
7 of the Best Cryptocurrencies to Buy in September
7 Best Long-Term ETFs to Buy and Hold
7 Best Clean Energy ETFs to Buy Now originally appeared on usnews.com
Update 09/06/22: This story was previously published at an earlier date and has been updated with new information.
