What Lies Ahead for Alternative Energy ETFs?
Alternative energy stocks as well as the corresponding ETFs suffered when oil prices toppled. Now, since prices are rebounding, it may be a good time for investors to revisit the alternative sector. Although the green energy sector is pretty volatile, it remains attractive and is engaging more funds than fossil fuels are.
Further, this sector could be a major beneficiary under a Clinton presidency as she is in favor of reducing US dependence on fossil fuels. As recent polls suggest strong possibility of a Clinton win, investors should take a look at alternative energy stocks and ETFs. (Read: Clinton vs. Trump—Best Stocks & ETFs to Bet on)
Since the transformation of the global energy system forms the backbone of climate action, the world has come closer under a set of major cooperative initiatives. These environmental considerations are driving demand for alternative energy sources.
Last year was historic for the U.S. renewable energy sector, with a number of important decisions taken at both the state and federal levels. These should be crucial to the trajectory of this industry’s growth.
A U.S. Energy Information Administration (“EIA”) report projects that electricity generation from renewable sources will increase by 13% in 2016 and 3.3% in 2017 in the U.S. Generation from renewables other than hydropower is forecast to grow 14.5% in 2016 and 8.9% in 2017.
Prospects in Solar & Wind
A major growth area in the renewable space is solar energy. An EIA report indicates continued growth in utility-scale solar power capacity, which is projected to average almost 14 gigawatt (“GW”) in the 2015–2017 period. In spite of the rapid uptake, utility-scale solar will still be just 1.2% of total U.S. utility-scale generation in 2017, suggesting ample room for growth.
The finalized Clean Power Plan for CO2 reduction and tax credit extensions for both solar and wind have been important drivers of green energy growth in the U.S. (Read: Dark Clouds Over Solar ETFs Post Q2 Earnings?)
Per the latest findings by the Solar Energy Industries Association, the U.S. solar energy industry grew 24% year over year in the first quarter of 2016, bringing cumulative PV installations to 29.3 GW DC, buoyed by strong contribution from each of the three segments: utility, commercial and residential. Particularly, the residential and Non-Residential PV markets grew 34% and 36% year over year, respectively. In 2016, 14.5 GWdc of new PV installations are expected to come online, showing 94% growth over 2015, with utility PV being the major driver.
Meanwhile, the U.S. wind industry grew over 296% year over year during the first quarter of 2016, having installed 520 MW. This marked as the strongest first quarter for installations since 2012.
Factors That Could Jeopardize the Green Sector
There are a host of factors plaguing the global economy. China happens to be one of them. Slowdown in China would likely aggravate global economic woes and hurt revenues of U.S. companies.
Gross domestic product or GDP in the world’s second-largest economy grew just 6.7% in Q1, marking the country’s slowest growth since the global financial crisis. Q2 growth is projected to be at or below the first quarter level.
As the world’s biggest producer of solar panels is now contending with shrinking exports along with industry overcapacity, its solar industry may also be at risk. (Read: Top and Flop Sector ETFs YTD)
While the industry is faced with a number of near-term challenges, the renewable energy sector’s long-term potential is undeniable as demand for green energy is strengthening at a rapid clip.
ETFs to Tap the Sector
For investors seeking to play this trend in the ETF form, the following alternative energy ETFs could be interesting picks.
WilderHill Clean Energy Portfolio (PBW)
Launched in March 2005, PBW tracks the WilderHill Clean Energy Index and manages an asset base of $89 million, which it invests in a portfolio of 39 stocks.
It is well diversified across various sectors. Information Technology takes the top spot with a 44.08% allocation followed by Industrials (21.68%) and Utilities (17.22%).
The fund’s top 10 holdings jointly contribute 36.39%. The product invests almost 90% in companies that are involved in the generation of cleaner energy and conservation. It charges a hefty 72 basis points in fees.
Market Vectors Global Alternative Energy ETF (GEX)
Launched in May 2007, GEX tracks the Ardour Global Index, focusing on companies that are primarily engaged in the business of alternative energy comprising solar power, bio energy, wind power, hydro power and geothermal energy.
The fund holds about 31 stocks in its basket, has assets under management of $82.8 million and charges an expense ratio of 62 basis points annually.
Apart from robust holdings in the U.S., the product offers solid exposure to China and some European countries. From a sector perspective, Industrials and Information Technology take the largest share with a respective 52.1% and 24.6%. Further, the fund’s top 10 holdings jointly contribute 64.24% to the fund. Eaton Corp Plc (ETN), Tesla Motors Inc. (TSLA) and Vestas Wind Systems A/S are the top three holdings, with 29.89% of asset allocation in total.
Global Clean Energy Portfolio (PBD)
This ETF follows the WilderHill New Energy Global Innovation Index, giving investors exposure to about 94 companies that are engaged in renewable sources of energy and technologies facilitating cleaner energy.
Assets under management are just over $56.6 million and expense ratio is 77 basis points a year. The fund’s top 10 holdings contribute 20.39% to it.
PBD is heavy in Information Technology, as this represents 30.29% of the fund. This is followed by Utilities (29.69%) and Industrials (28.57%). In terms of countries, the U.S. dominates with 28.12% followed by China with 16.11%.
First Trust Nasdaq Clean Energy Green Energy Index (QCLN)
This ETF tracks the NASDAQ Clean Edge Green Energy Index and follows a benchmark of clean energy companies, giving exposure to 43 such companies in total with an asset base of $65.5 million. The fund charges investors 60 basis points a year for the exposure. The top 10 holdings comprise 58.04% of the total fund.
Technology firms dominate this ETF, accounting for 28.81% of the assets, followed by Industrials (23.71%) and Oil and Gas stocks (22.62%). In terms of geographical diversification, the fund is almost entirely focused on the U.S. market.
iShares Global Clean Energy ETF (ICLN)
This ETF tracks the S&P Global Clean Energy Index with 30 holdings and an asset base of $79.4 million. ICLN charges investors 47 basis points a year for the exposure.
In terms of geographical breakdown, China leads the list with 30.14%, while the U.S. holds the second spot with 25.38%. ICLN is more inclined toward Renewable Electricity, representing 26.49% of the fund, though Heavy Electrical Equipment receives a big chunk as well (14.71%).
The fund appears highly concentrated on the top 10 holdings with a share of 50.87%.
Bottom Line
The depletion of fossil fuel reserves, new and advanced technologies, and more competent alternative energy applications have made green power more feasible, injecting optimism into the sector. Yet investors should closely track political factors like eco-friendly mandates and renewable energy agendas to see if potential benefits spill over to renewable companies and sector ETFs.
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PWRSH-W CL EGY (PBW): ETF Research Reports
VANECK-GLBL AE (GEX): ETF Research Reports
PWRSH-GLB CL-EY (PBD): ETF Research Reports
NASDAQ-CL EDG G (QCLN): ETF Research Reports
ISHARS-GL CL EN (ICLN): ETF Research Reports
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