- Clean energy ETFs are funds that invest in renewable energy companies like SunRun and First Solar
- They’re part of a wider category of environment, social and governance (ESG) funds, which select investments based on criteria that falls outside the traditional financial model
- This is a positive for the world as a whole, but it can also provide sizeable returns
The world is going green. Slowly, to be sure, but it is happening. Just a few short years ago, electric vehicles didn’t even exist in the mainstream. Today they’re becoming more popular every year, and eventually they’re likely to be the only type of car on the road.
We’re seeing the same trend happening all across industry, with companies looking to reduce their carbon emission, create less waste and recycle more.
Not only that, we’ve also seen a whole new investment class emerge in the form of carbon credits. It’s a brave new world for investors, and done correctly, it’s a wave that could lead to real long term gains.
For investors looking to gain access to these investments without needing to pick stocks individually, there are a wide range of clean energy ETFs and broader ESG type funds that can offer some solid options for investors.
Want to invest in the green revolution but don’t know where to start? Q.ai’s Clean Tech Kit uses AI to predict the performance and volatility of a wide range of assets geared towards a better future. The Kit is automatically rebalanced every week based on these predictions, and invests in sectors like electric vehicles, hydrogen fuel cell tech and wastewater management.
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What is ESG investing?
When talking about green or ‘ethical’ investing, the catch-all term that’s generally used is ESG. This is an acronym for Environment, Social and Governance. The idea behind this is to categorize investments that aren’t based purely on financial motives.
Of course, there are a lot of areas that fall into this.
ESG investing traces its origins back to the 1960’s where activist investors looked to exclude stocks and investment funds with exposure to certain areas or products. Examples from back then include tobacco companies and those with ties to apartheid South Africa.
Another long standing mainstream issue is the environment, with carbon emissions and investment funds that exclude, for example, oil and mining companies, having been around for many years.
Now the net is even wider. There are many social issues that can be included under the ESG umbrella, including equity, diversity and inclusion. The governance aspect includes business practices such as executive pay, diversity of the board of directors and accounting methodologies.
As you can see, the definition of ESG is wide reaching and open to interpretation. Because of this, there’s no recognized global standard on what constitutes an ESG fund. What is immoral or unacceptable for one person will be perfectly acceptable to another.
Overall though, there are general themes that investors can choose to align their portfolios with. While it may not be perfect, it is possible to create a portfolio that is much closer to their values than if they ignored ESG factors altogether.
What is a clean energy ETF?
A clean energy ETF is a fund that focuses on the ‘E’ in ESG. Obviously the energy sector is a major part of the current world environmental situation. Carbon emissions and depleting natural resources are a major concern for many around the world, and oil and mining companies have a major part to play in this.
A clean energy ETF looks to instead invest in ways that help tackle this problem.
Again though, there’s no specific definition of what this must look like, and each investment manager will have their own approach. For example, some clean energy ETFs will look to exclude energy producers altogether, and invest only in renewable energy companies that fund tech like wind or solar farms.
Others may not exclude oil companies altogether, but may implement a screening process that invests only in oil companies that are investing a certain amount in renewable energy. This is a fantastic compromise for some investors, and a total deal break for others.
You can see how this is challenging!
Clean energy ETF examples
As the old saying goes, past performance doesn’t guarantee future results, but below are some of the best performing clean energy ETFs over the past five years.
Invesco Solar ETF
This super focused ETF is based on the MAC Global Solar Energy Index and invests only in the companies in the solar energy industry. It’s a niche fund that will rise and fall based on the prospects only of solar, but so far it’s worked out with growth of 210% over the last 5 years according to Nerdwallet.
First Trust NASDAQ Clean Edge Green Energy ETF
This fund takes a wider approach, investing in a range of different clean energy sectors. These include solar, but also wind power, batteries, electric vehicles and fuel cells. It’s designed to track the NASDAQ Clean Edge Green Energy Index and has returned 152.14% over the last 5 years.
iShares Global Clean Energy ETF
Another fund that invests in multiple forms of renewable energy, this ETF invests in companies like First Solar, Vestas Wind Systems and SunRun. Over the past five years it has provided a return of 103.98%
VanEck Low Carbon Energy ETF
This ETF takes an even wider approach, looking at all forms of energy that create low carbon emissions. It tracks the MVIS Global Low Carbon Energy Index and includes investments in technology such as solar, wind, hydrogen, batteries, smart grids, geothermal and low emission building materials. It’s returned 82.6% over the last five years.
The benefits of investing in green technology
The benefits are pretty obvious when it comes to the non-financial stuff. Many investors want to feel that their money isn’t just providing them with a return, but also that it’s helping shape the world to one that’s aligned with their values.
But it’s not all warm and fuzzies. ESG is continuing to gain traction and investment dollars, as well as attracting lucrative government subsidies and grants. President Biden’s Infrastructure Spending Bill is a recent example, including billions of dollars for clean energy.
The downsides of investing in green technology
Whenever you exclude sectors or asset classes from your portfolio, you increase its concentration. This can mean better returns if the remaining assets perform well, but it can also mean more risk.
In 2022, for example, energy producers were some of the only companies whose stock managed to hold up. Investors who had excluded them from their portfolio missed out on those returns.
The bottom line
There’s no denying that clean energy and ESG investing in general is here to stay. The hard part is knowing where to put your cash, given how fast the industry moves, and how quickly things like government funding can be granted or cut.
That’s why getting some help to run the day to day can make a lot of sense. You can do this by using a professional fund manager, but of course, you could also use AI instead.
Q.ai’s Clean Tech Kit uses AI to invest in a range of clean energy investments. It’s not a full ESG portfolio, but our AI analyzes a wide range of U.S. and international stocks and ETFs that work with tech like renewable energy, electric vehicles, clean health and beauty products and alternative fuel producers.
It then predicts how these are likely to perform in the coming week, and then automatically rebalances the Kit in line with these projections.
Download Q.ai today for access to AI-powered investment strategies.