Solar and clean energy ETFs soar

Jul 24th, 2019 | By | Category: Equities

ETFs providing exposure to the clean energy sector are among the best performers globally year-to-date (YTD), benefitting from a combination of higher oil prices, green energy initiatives, and broader equity market momentum.

clean energy etfs

Strong performance in the solar industry has helped clean energy ETFs to be amongst the best performers year-to-date.

Solar stocks, in particular, are having a blinder, lifted by new regulations such as the New Homes Mandate in California which requires the inclusion of solar panels in new homes being constructed after 2020.

The industry’s robust performance has led to an impressive 55.3% YTD return for the Invesco Solar ETF (TAN US), the only pure-play solar ETF.

The fund, which comes with an expense ratio of 0.70% and houses around $400 million in assets under management, is linked to the MAC Global Solar Energy Index.

The index consists of stocks from developed market countries that derive at least one-third of their revenue from the solar industry. Constituents are weighted by modified market capitalization with the weight of firms that derive more than two-thirds of their revenue from solar operations being proportionally doubled.

There are several ETFs that include solar within a broader allocation across the clean energy theme. All of these funds have outperformed the 20.3% return for the SPDR S&P 500 ETF (SPY US) YTD.

Among these broader clean energy funds, Invesco again leads the way. Its $180m Invesco WilderHill Clean Energy ETF (PBW US) has risen 41.6% YTD.

This fund tracks the WilderHill Clean Energy Index which only includes US equities but diversifies across the clean energy sector. The index has a modified equal-weighting methodology with sector and stock weights determined by their perceived significance to the clean energy theme. An individual cap of 4% per constituent aims to promote stock-level diversification.

The fund comes with an expense ratio of 0.70%.

Other clean energy ETFs providing market-beating returns include the $70m ALPS Clean Energy ETF (ACES US), up 35.8% YTD, and the $250m iShares Global Clean Energy UCITS ETF (ICLN US), up 31.5% YTD. Both funds offer a global focus on the clean energy theme and come with expense ratios of 0.65% and 0.47% respectively.

One of the reasons clean energy ETFs are outperforming is that oil prices have risen in 2019 as an increase in fossil fuels has historically been correlated with increased demand for renewable energy. Brent crude has climbed off its 2018 low of $50.5 a barrel on Christmas Eve to a high of $74.6 (24 April 2019) and is currently trading around $64.

Investors should note, however, that while clean energy ETFs can offer the potential for alpha generation as part of a broadly diversified portfolio, they do exhibit notably higher volatility than the market, reflecting an industry in flux and a market cap profile that is tilted to small- and mid-cap firms.

The rolling one-year volatilities of the Invesco Solar ETF and Invesco WilderHill Clean Energy ETF, for example, are 24.9% and 23.9% respectively, compared to 15.2% for SPY.

Solar and clean energy ETfs

YTD performance (USD).

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