Now more than ever, a renewable energy ETF makes sense. Find out how to choose the right one for your investment goals.
Treading into the topic of renewable energy and choosing a renewable energy ETF is challenging to do without getting into politics, but believe it or not, we’re about to do just that. It’s probably safe to say that most of us, regardless of political persuasion, enjoy saving money. It’s hard to imagine that people are clamoring at the doors of their utility companies, asking for higher electric bills. So it only makes sense, economically, for renewable energy to replace oil and coal. After all, solar, wind, and hydroelectric power are all free.
And yes, this is just the power generation. The infrastructure for renewable energy is expensive. We can’t ignore those costs. But we also aren’t going to run out of sunlight or wind, and if we do, we have much bigger problems than energy generation! Even on a personal level, adding solar power to your home can increase its value and reduce or eliminate your electric bill.
Then there’s the simple fact that the renewable energy sector is growing at breakneck speeds. The International Energy Agency (IEA) reports that global renewable energy capacity grew 45% in 2020. Despite that growth, it’s not uncommon for companies to struggle. The solar industry has a trail of bankruptcies, and wind energy is not without its issues, too. That’s why a renewable energy ETF is an easy way to take advantage of this growth without putting too much at risk.
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What to look for in a renewable energy ETF
There are some different strategies when it comes to renewable energy ETF investing. There are broad-based ETFs, like the iShares Global Clean Energy ETF (ICLN). This ETF has a mix of solar and wind power companies, but it also includes companies such as Plug Power Inc (PLUG), which develops and manufactures hydrogen fuel cell systems.
Alternatively, you could look at a renewable energy ETF that is focused on a particular sector. For example, the Invesco Solar ETF (TAN) primarily holds solar companies such as First Solar Inc (FSLR).
Putting that aside for a moment, there are some similarities betweenanalyzing a stock and analyzing an ETF. There are also some differences.
Like stocks, ETFs have charts. You can look at the relative performance, historical share price, dividend yield, and percentage of price increases and decreases over time. Unlike stocks, ETFs have a gross expense ratio, which is what it costs you to have someone manage the ETF. To use the two ETFs above, ICLN has an expense ratio of 0.46%, and for TAN, it’s 0.69%. This is something important to consider as you look at the dividend and the overall performance of an ETF.
ETFs may also hold any number of stocks, and a renewable energy ETF is no different. In fact, they can be vastly different. For example, the VanEck Vectors Low Carbon Energy ETF (SMOG) counts Tesla (TSLA), NextEra Energy Inc (NEE), and NIO Inc (NIO) among its top holdings.
By contrast, the Invesco WilderHill Clean Energy ETF (PBW) holds JinkoSolar Holdings Co Ltd (JKS) and Singapore-based Maxeon Solar Technologies Ltd (MAXN) as two of its top holdings.
The holdings represent different approaches to constructing an ETF. One is not necessarily better than the other, but it may shift the appeal based on what you’re looking for. So, how do you choose the right one?
Start with the returns, including year-to-date, one month, three months, six months, one year, three years, and so on. This gives you a nice overview of the ETF’s returns over time. As you know, any stock can have a bad month and look terrible, but when you look back over several years, things could seem a lot different.
When you’re ready to really dig in, take a look at the stocks your renewable energy ETF holds. You may find some real surprises there. For instance, SMOG is a “low carbon energy” fund, but approximately 20% of its holdings are in electric vehicle companies. And at least one of their holdings is an over-the-counter stock with a five-year history of decreasing cash flow.
What this all means is that you have to do your homework. Treat ETFs like you would any stock. Dig in to see if the fundamentals look good and if the charts make sense. Look at the top holdings and determine whether or not you would invest individually in those companies. They won’t all be winners. That’s part of the appeal of an ETF – spreading the risk around. But you can’t have an ETF full of losers and expect to make money.
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Have you invested in any renewable energy ETFs?