Editor’s note: This story was previously published in December 2018. It has since been updated and republished.
Alternative energy is an increasingly prominent theme not only on the energy consumption front, but in the investment universe as well. A slew of exchange-traded funds (ETFs) focus on these themes, but there are only a few clean energy ETFs that truly stand out from the pack.
Scores of data points confirm the move away from traditional fossil fuels to clean energy sources. For example, California, the largest U.S. state, recently put into the state building code a mandate that all new homes built there, starting in 2020, must have solar panels. Other data points indicate renewables are pressuring traditional power sources, such as coal.
“The competitive environment for coal-fired power in the generation marketplace is becoming ever more challenging as the price of renewables continues to fall and as natural gas prices are expected to remain low for the foreseeable future,” according to the Institute For Energy Economics and Financial Analysis (IEEFA).
Declining costs are fostering adoption of renewables and that trend could be a long-term catalyst for clean energy ETFs.
“The cost of building a new utility-scale solar or wind farm has now dropped below the cost of operating an existing coal plant, according to an analysis by the investment bank Lazard,” reports CBS.
Here are some of the best clean energy ETFs to consider in 2019.
ALPS Clean Energy ETF (ACES)
Expense Ratio: 0.65% per yer, or $65 per $10,000 invested
Among clean energy ETFs, the ALPS Clean Energy ETF (NYSEARCA:ACES) is one of the newest having debuted late last June. Despite its rookie status, ACES may also be one of the most compelling clean energy ETFs due to its multi-theme exposure. While many clean energy ETFs focus on a specific part of the alternative energy universe, such as electric vehicles, solar or wind, ACES offers exposure to all those themes and then some.
This clean energy ETF features solar, wind, smart grid, biomass, geothermal, electrical vehicle/storage and fuel cell stocks, giving it a broader reach than more established clean energy ETFs that you can buy.
“The fund’s underlying index has a differentiated approach to investing in the sector. First, by narrowing the list of constituents to companies whose primary operations are focused on clean energy, the fund offers more pure-play exposure to the sector,” according to ALPS.
ACES holds 34 stocks and the largest holding is Cree (NASDAQ:CREE) at a weight of 5.75%.
Invesco WilderHill Clean Energy ETF (PBW)
Expense Ratio: 0.70%
The Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW) is just a few months shy of its fourteenth birthday, making it one of the more seasoned clean energy ETFs to buy on the market. The $105.10 million PBW targets the WilderHill Clean Energy Index.
That index “is composed of stocks of companies that are publicly traded in the United States and engaged in the business of advancement of cleaner energy and conservation,” according to Invesco.
The average market value of PBW’s 39 holdings is $4.70 billion, indicating this clean energy ETF is a mid-cap fund. Just about 14% of PBW’s constituents are classified as large caps. Another factor investors must consider with clean energy ETFs is that many of the stocks populating this investment niche are growth names.
PBW fits that bill as over 48% of its components are classified as growth stocks. A price-to-earnings ratio of over 48 confirms this clean energy ETF’s growth tilt.
Invesco Solar ETF (TAN)
Expense Ratio: 0.70%
The Invesco Solar ETF (NYSEARCA:TAN) is one of the largest clean energy ETFs despite its focus on one segment of the alternative energy space. Solar stocks are struggling this year, as highlighted by TAN’s year-to-date decline of over 20%, but this clean energy ETF could be one to watch in 2019.
Morgan Stanley recently raised a Market Weight rating on First Solar (NASDAQ:FSLR), TAN’s largest holding at a weight of 10.62%. The firm restored its former price target on the largest U.S. solar company to $60 from $56.
Solar installation trends in the U.S. and around the world bode well for TAN over the long-term.
“A record 8.5 gigawatts (GW) of utility solar projects were procured in the first six months of this year after President Donald Trump in January announced a 30 percent tariff on panels produced overseas, according to the report by Wood Mackenzie Power & Renewables and industry trade group the Solar Energy Industries Association,” reports Reuters.
SPDR Kensho Clean Power ETF (XKCP)
Expense Ratio: 0.45%
The SPDR Kensho Clean Power ETF (NYSEARCA:XKCP) is another one of the newer entrants to the clean energy ETF space, having debuted in October. XKCP is also one of the more unique clean energy ETFs investors will find.
The fund’s underlying benchmark uses “artificial intelligence and a quantitative weighting methodology to capture companies whose products and services are driving innovation behind the clean energy sector, which includes the areas of solar, wind, geothermal, and hydroelectric power,” according to State Street.
XKCP holds 43 stocks with an average market value of $18.29 billion. Enphase Energy (NASDAQ:ENPH) is the fund’s largest holding at a weight of 5.25%. This clean energy ETF is diverse at the industry level, featuring exposure to 15 industries, including utilities, semiconductors and renewable electricity, among others.
VanEck Vectors Global Alternative Energy ETF (GEX)
Expense Ratio: 0.63%
The VanEck Vectors Global Alternative Energy ETF (NYSEARCA:GEX) is a clean energy ETF with multiple applications across the alternative energy investment landscape. While GEX holds just 30 stocks, its roster spans bio mass, wind, solar, hydro and geothermal companies as well as companies that offer related products and services.
GEX offers some level of renewable purity because its underlying index mandates that member firms derive at least half their revenue from clean energy endeavors. Just 4% of GEX’s components are not large or mid caps.
Relative to some other clean energy ETFs to buy, GEX sports attractive valuations as confirmed by a price-to-book ratio of just over 1 and a price-to-earnings ratio of 14.03.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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