Clean energy exchange-traded funds were among star performers in 2020, rewarding investors amid expectations that the then candidate and former Vice President Joe Biden would win the presidency and Democrats would gain control of the Senate.
Obviously, both of those situations came to pass, but 2021 is proving trying for investors that embraced clean energy ETFs last year and didn't take profits in those funds in the first quarter. Politics have a way of hindering investor outcomes and that has been the case with renewable energy ETFs this year.
To be fair, it's not President Biden's fault. He's trying to live up to his pledge to spend mightily on renewables. But the much talked about $3.5 trillion reconciliation package, which contains some “Green New Deal” goodies, isn't just off-putting to some Republicans, some moderate Democrats are balking at that massive deal too.
It's all enough to give investors a clean energy ETF headache. Alas, for those that missed out on the 2020 run by these funds and for those that are simply committed to environmentally sound investing, 2021 lethargy in the group is leading to compelling buying opportunities. With that in mind, here are a few clean energy ETFs to consider.
First Trust/Clean Edge Smart Grid ETF (GRID)
The First Trust/Clean Edge Smart Grid ETF (GRID) is the original ETF dedicated to smart grid investing, a concept that's becoming more relevant by the day. As blackouts in California over the course of various summers and the unexpected cold spell in Texas earlier this year confirm, the U.S. electrical grid is in dire need of rehabbing.
More expenditures toward smart grid technology are expected around the world as adoption of renewable sources rises. Alone, that's a long-term plus for GRID, but investors can also be encouraged by this ETF's role at the center of the electric vehicle (EV) boom.
“One simple reason that increased EVs sales may accelerate capital investments in the power grid is that they will increase demand for electricity to charge batteries, offsetting a decline in demand for gasoline,” according to First Trust research. “The Energy Information Administration forecasts that US electricity generation will grow by around 10% from 2020 to 2030, driven mainly by economic growth and offset by efficiency gains.”
Translation: As EV purchases increase, which is going to happen, GRID member firms will become all the more relevant.
“GRID is an ETF that invests in companies around the world that that are involved in power grid infrastructure, smart meters, energy management, connected mobility, and related activities," adds First Trust. "We believe many of these companies will provide the products and services needed for the build out and modernization of the power grid around the world.”
Invesco Solar ETF (TAN)
The Invesco Solar ETF (TAN) is one of the forefathers of the clean energy ETF space and when these funds are trending higher, TAN is often one of the pilots of those moves. The solar ETF is taking its lumps this year, but this could be ultimately prove to be a buying opportunity for shrewd investors.
“Global investment in clean energy is a multi-trillion dollar, multi-decade effort that will drive secular growth for many companies leading the transition away from carbon through the next several business cycles,” BMO said in a recent note.
The research firm is bullish on TAN components, including SolarEdge Technologies Inc. (SEDG), Enphase Energy (ENPH), Sunrun (RUN) and Sunnova Energy International Inc. (NOVA).
“Enphase is the world leader in microinverters, which convert direct current produced by solar panels into alternating current used by homeowners,” says Morningstar analyst Brett Castelli. “Its primary end market is U.S. residential, which accounted for 80% of 2020 sales, but it plans to expand internationally and enter the small commercial market. We see the company in the early innings of a longer-term transition from a supplier of microinverters to a supplier of home energy systems: solar, storage, and software.”
KraneShares Global Carbon ETF (KRBN)
The KraneShares Global Carbon ETF (KRBN) is one of the more unique clean energy ETFs for the simple reason that it's not an equity-based fund. Rather, KRBN is levered to cap-and-trade programs, such as the European Union Allowances (EUA), California Carbon Allowances (CCA) and the Regional Greenhouse Gas Initiative (RGGI).
KRBN, which tracks the IHS Markit Global Carbon Index, may seem like a complex concept, but it's not. In fact, plenty of investors are buying into this carbon-sensitive strategy. KRBN is just 15 months old and already has nearly $960 million in assets in assets under management.
The idea here is being long carbon and that's a good thing because “...according to IHS Markit, as of December 31, 2020 the global price of carbon was $24.05 per ton of CO2. It is estimated that carbon allowance prices need to reach $147 per ton of CO2 to meet a 1.5°C global warming limit,” notes KraneShares.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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