The landmark climate legislation signed recently by President Joe Biden is designed to spur investment in clean energy and electric vehicles. That will burnish the prospects of several exchange-traded funds that focus on those themes. They’re not identical, though. Keep reading to learn about your options.
Since Biden signed the law, several major projects to build solar panels and make lithium batteries in the United States have already been announced. Beyond that, the climate bill signals what seems likely to be an ongoing commitment of the federal government to policies that will help curb emissions and hasten the transition to a low-carbon economy. Meanwhile in the states, California has just adopted new regulations requiring all new cars and light trucks to be zero-emission vehicles by 2035. Other states are expected to follow California’s lead.
After Inflation Reduction Act, Clean Energy ETFs See Inflows
In the month prior to the announcement that Senate Democrats had hammered out an agreement to address climate change as part of their Inflation Reduction Act, investors had pulled $194.4 million from the five-largest renewable energy ETFs and four-largest electric vehicle ETFs available to U.S. investors. From the time the agreement came to light on July 27 through the end of August, these renewable energy and electric vehicle ETFs drew positive net flows of $189.7 million.
Those who haven’t yet invested in these areas are not too late to the party. Investing in clean energy funds and EVs is not really a short-term play on the climate bill; it’s a long-term investment in the energy transition that is taking place now and will continue for decades.
When it comes to choosing a fund to provide thematic exposure to clean energy and EVs, investors have an array of choices. A number of funds have launched in the past year or two that reference the energy transition and climate solutions as broad themes. But several more-seasoned ETFs exist that focus more specifically on renewable energy, electric vehicles, and battery technology. Even among these, there is a fair amount of variation in their investment approach.
The five clean energy ETFs discussed below invest in companies producing renewable energy and in “clean tech” companies providing the technology that supports the development of renewable energy, including energy storage and efficiency solutions. Clean energy ETFs differ in a number of important ways. Investors need to consider whether they want mainly U.S. exposure or global exposure, how much small-cap exposure to take on, and concentration risk. Not all devote assets to EVs and related technologies, so I will also take a look at some ETFs that are specifically focused on those areas.
Clean Energy ETFs
Clean Energy ETFs
The Largest Clean-Energy ETFs
With $5.8 billion in assets, iShares Global Clean Energy ICLN is the largest clean-energy ETF. Itfocuses on companies producing renewable energy or providing the technology for clean-energy production and uses. The fund is global in scope, with about half of assets in the U.S. and half outside the U.S. spread among about 100 large- and mid-cap holdings. Its largest position, at a hefty 10.4% of assets, is U.S.-based Enphase Energy ENPH, which makes solar micro-inverters, battery energy storage, and EV charging stations. SolarEdge Technologies SEDG (6.4% of assets) an Israeli firm, is focused on solar micro-invertors and battery energy storage. The third-largest holding, Vestas Wind Systems VWSB (6.1% of assets), is the world’s largest wind turbine maker. From a traditional sector perspective, the fund has 39% of assets in utilities that produce clean energy, 37% in technology, and 21% in industrials. A three-year standard deviation of returns of 35.4 shows the fund’s volatility, but ICLN is the least volatile of the clean energy funds on this list. Its annualized trailing five-year return through August is 21.2%. With an expense ratio of 0.42%, ICLN is also the cheapest option of those discussed here.
First Trust Nasdaq Clean Edge Green Energy ETF QCLN is the second-largest clean-energy ETF. Although this $2.5 billion fund is U.S.-focused, it has a broader investment scope than ICLN does. In addition to renewable energy producers and enablers, the fund invests in energy efficiency and management, exemplified by third-largest holding ON Semiconductor ON (7.6% of assets), and in EVs, with Tesla TSLA (7.6% of assets) its number-two holding. QCLN’s largest holding is Enphase Energy; at 11.6%, it has an even heftier position than ICLN. This is a compact 65-position portfolio split between large- and mid-cap stocks. It has only a 10% position in utilities, reflecting less focus on clean power producers, 46% in technology, and 18% in consumer cyclicals, reflecting its EV exposure. With less exposure to utilities and more to technology, QCLN is a bit more volatile than ICLN, with a three-year standard deviation of 43. Investors have been rewarded for that volatility with a 28.6% annualized trailing five-year return. Its expense ratio is 0.58%.
The distinguishing feature of the third-largest clean-energy ETF, Invesco WilderHill Clean Energy PBW, is its focus on U.S. small caps. Two thirds of assets in this $1.3 billion ETF are in small-cap stocks, and only 7% are in large caps. The portfolio is spread in roughly equal fashion across its 80 holdings, so it avoids the risk of taking large positions. The fund’s emphasis is on clean energy and energy storage. Its largest holding, Fluence Energy FLNC, a producer of storage, takes up only 2.2% of assets. The second-largest holding, First Solar FSLR, produces utility-scale solar arrays. The third-largest holding, Stem STEM, is another energy storage producer. The fund has 31% of assets in technology, 30% in industrials, 18% in consumer cyclicals, and only 8% in utilities. Its three-year standard deviation is 50.4, a reflection of the volatility that comes with its small-cap and thematic focus. While other funds on this list have posted smaller losses or even gains this year, PBW has lost 18.5% this year through August in what has been a difficult year for small caps. Its five-year trailing return is 23.1%. Its expense ratio is 0.62%.
The $845 million ALPS Clean Energy ACESfocuses on small- and mid-cap U.S. and Canadian companies that are sources of renewable energy or involved in EVs, energy storage, lithium, smart grid, and energy efficiency. In a compact portfolio of only 44 names, First Solar (7.5% of assets) is its top holding, and Enphase Energy (6.7%) is its second-largest holding. The third largest is Plug Power Original Postlug/quote" target="_blank" rel="noopener">PLUG (6.4%), which develops hydrogen fuel cell systems. The fund has 30% of assets in technology, 28% in utilities, and 19% in consumer cyclicals. Its three-year standard deviation is 41.3. This is a younger fund that has yet to reach the five-year mark, but it has posted a 28.6% annualized trailing three-year return, which is a little better than that of PBW. Its expense ratio is 0.55%.
SPDR Kensho Clean Power ETF CNRG invests its $367 million portfolio in clean energy generation and transmission and clean energy technology, including storage devices. First Solar (4.2% of assets) is the top holding here, and Enphase Energy (3.4% of assets) is number three. Number-two holding Array Technologies ARRY (3.6% of assets) makes utility-scale solar tracking technology, which makes solar arrays more efficient. The fund is primarily focused on small and mid-caps in the U.S. It has 38% of assets in technology, 32% in utilities, and 27% in industrials. Its three-year standard deviation is 38.6, second lowest in this group, and its three-year annualized trailing return is 36.9%, which is the best in this group. Its expense ratio is 0.45.
While those five funds have some exposure to battery technology and electric vehicles, investors may also consider ETFs focused on these areas.
Lithium ETFs, Anyone?
With $4.5 billion in assets, Global X Lithium and Battery Tech LIT invests in companies involved in lithium mining and lithium battery production. It is a compact large-cap portfolio of 40 names, with 77% of assets in non-U.S. companies. At 13.7% of assets, its largest holding is Albemarle ALB, the largest producer of lithium batteries for EVs. Sociedad Quimica Y Minera De Chile SA ADR SQM (6.3% of assets) and China-based EVE Energy (6.1%) are the fund’s second- and third-largest holdings. Its three-year standard deviation is 32.3, and its trailing five-year annualized return is 19.4%. LIT’s expense ratio is 0.75%.
The much smaller $188 million Amplify Lithium & Battery Tech ETF BATT is similar to LIT in its focus and its mostly non-U.S. portfolio. It has 84 names and delves a bit more into small- and mid-caps than does LIT. Its largest holding is BHP Group BHP (6.9% of assets), the Australia-based mining company. Tesla (6.9%) is the second-largest holding. Third-largest holding, Contemporary Amperex Technology (6.8%), is a China-based lithium battery maker. The fund’s 33.7 three-year standard deviation is nearly identical to that of LIT, but BATT has not performed as well over time. Its trailing five-year annualized return is 15.2%. With an expense ratio of 0.59%, BATT is cheaper than LIT.
Investing in Electric Vehicle ETFs
Global X Autonomous & Electric Vehicles ETF DRIV focuses more directly on electric vehicles, including hybrids and autonomous driving technology. The $1 billion fund has 76 positions that are half large-cap and split between U.S. and non-U.S. companies. Not surprisingly, Tesla (3.6%) is the largest holding, with Apple AAPL (2.9%) and Microsoft MSFT (2.8%) the next largest. The large-cap portion of the fund is filled with big technology companies and automakers. Reflecting that, the fund’s three-year standard deviation is only 28. Its three-year annualized trailing return is 24.2%. DRIV’s expense ratio is 0.68%.
The $486 million iShares Self-Driving EV and Tech ETF IDRV, another electric vehicle ETF, takes a similar approach as DRIV, with half of assets in the U.S. and half outside the U.S., but has a mostly large-cap focus. Tesla (5.3% of assets ) is also the top holding here, with Apple (4.7%) and Alphabet GOOG (4.2%) in the next positions. With more in large caps and more names in the portfolio, this fund’s 26.6 three-year standard deviation is a little lower than that of DRIV. With a 20.3% three-year trailing return, however, the fund hasn’t performed as well as DRIV. Its expense ratio is lower, at 0.47%.
Most investors already have exposure in their diversified equity funds to the automakers and big technology companies that take up significant portions of these two funds’ portfolios. Thus, an investment in either of these ETFs should be less about getting basic exposure to the EV revolution and more of a deliberate bet on it.
Jon Hale ([email protected]) has been researching the fund industry since 1995. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.