Investors looking to maximize exposure to the global energy transition should consider coupling clean energy investments with exposure to traditional carbon-based sources.
Investing in both the Alerian MLP ETF (AMLP) and the ALPS Clean Energy ETF (ACES), which offer complementary exposure to the energy transition, is a solution for advisors looking to diversify portfolios and maximize potential upside.
The growth of renewable capacity is forecast to accelerate in the next five years, accounting for almost 95% of the increase in global power capacity through 2026. The energy transition from traditional carbon-based sources, such as crude oil and coal, to renewable clean energy sources, such as wind, solar, and biofuels, will rely heavily on existing infrastructure and natural gas in particular, which made up 24% of primary energy consumption in 2020, according to SS&C ALPS Advisors.
Midstream is an attractive investment for several reasons: The U.S. is the world’s largest producer of oil and natural gas with significant reserves; natural gas prices, along with natural gas liquids (NGLs), have significantly recovered this year amid improving demand; and natural gas demand is forecast to grow through 2030 with continued infrastructure build-out, according to ALPS.
An investment in clean energy offers exposure to a high-growth industry, which will continue to gain market share. Global superpowers have unveiled aggressive carbon-neutral goals and clean energy policies with massive fiscal stimulus measures, clean energy technology costs continue to plummet as global adoption increases, and renewables continue to gain market share for power generation, according to ALPS.
U.S. midstream companies will remain a valuable part of energy production, as they are uniquely equipped to handle the increasing crude, natural gas, and NGL export demand over the next decade, while also acting as the transportation infrastructure to a number of renewable fuels, such as hydrogen for fuel cells, renewable diesel, and ethanol.
The blended strategy — an equal allocation to ACES and AMLP — may offer improved risk-adjusted returns with a yield of 4.43%, and represents an alternative to choosing between high yield in the midstream MLP sector and high growth in clean energy, according to ALPS.
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