Clean Energy ETFs for a Cleaner Future

The industrial revolution, between 1760 and 1840, marked the start of a transition to new manufacturing processes in Great Britain, Continental Europe, and the United States. Since then, societies have largely relied on fossil fuels to power their homes, factories, and means of transportation. 

Fast forward to today and the devastating impact of climate change and global warming are everyday headlines. There is pressure on everyone - from individuals to companies and governments across the globe - to play their part in becoming more environmentally aware and accepting of the urgent need for change and a move away from fossil fuel reliance.

One possible solution is to invest in clean and/or, green energy. And yes, there is a difference between them! While green energy refers to energy derived from natural resources, clean energy is the energy derived from sources that do not release pollutants. 

This article takes a closer look at clean energy and considers the two exchange traded funds with most weekly inflows adopting this theme.

Clean Energy in a Nutshell

Clean energy includes renewables and clean technologies that facilitate a more sustainable energy system; one that significantly reduces carbon emissions when compared to traditional forms of energy.

Clean Energy Outlook

Senator Joe Manchin supported a budget reconciliation bill that was unveiled late July by the U.S. Senate Democrats. The bill contains consumer incentives for electric vehicles and energy efficiency with USD$369 billion to be spent over the next decade on climate and energy. The bill has a high probability of being turned into legislation through a majority vote in the Senate. This legislation is expected to invest in hydrogen, fossil fuels and energy storage technologies, nuclear, and renewable energy. It also aims to reduce carbon emissions by almost 40% by introducing tax credits for clean energy and domestic energy manufacturing.

Industry pundits believe that the outlook over the next decade is compelling given the attractive growth potential. It looks like geopolitical dynamics are inclined to support increased domestic energy production, particularly for renewable energy. Over the long term, the biggest headwind will be the ability to meet surging demand. Meanwhile, over the shorter term, the clean energy sector must overcome supply chain disruptions and inflationary pressures.

Clean Energy Investment Opportunity

Clean energy requires a total decarbonization of the energy sector, with a focus on energy efficiency, solar, wind, carbon capture, as well as different fuel sources such as hydrogen and other renewables.  And as the industry embarks on this transition – requiring trillions of dollars of capital over the next several years - all evidence points towards significant growth potential for investors.  New technologies, plummeting costs and broad policy support in the form of new legislation, consisting of both incentives and mandates, will further help in the push to achieve emission targets. 

Effects of the Eastern European Conflict on the Clean Energy Sector

As soon as war erupted on the Russian-Ukrainian borders, governments in Europe began raising energy security concerns and the pressing need to lessen the dependence on Russian oil and gas. Recognizing the role renewables can play in meeting surging demand, plans are in place to accelerate deployment with the German government taking the lead.  It aims to achieve 100% renewable power by year 2035 by expanding its wind and solar energy farms.

From a risk perspective, Russia is an important producer of nickel and other raw materials that are used in the production of clean energy systems. However, industry pundits generally believe that the impact of supply chain disruptions should be manageable.

Clean Energy ETFs Available to Global Investors

Trackinsight's ETF Screener identifies 37 Clean Energy ETFs available to global investors, excluding leveraged and inverse ETFs. These offerings belong to the ‘Alternative Energy’ theme following the ‘Alternative Energy’ trend which captures the investment opportunity in the following three megatrends: ‘Technology Innovation’, ‘Rising Urbanization’, and ‘Environmental Changes’. The 37 ETFs adopt the Sustainable Development Goal number 7 ‘Affordable and Clean Energy’.

Clean Energy ETFs have attracted USD$232 million of investor capital year-to-date, with USD$18.71 billion of AUM. The funds have performed relatively well compared to other market segments averaging 10.71% week-to-date.

iShares Global Clean Energy UCITS ETF (INRG), the biggest Clean Energy ETF as measured by assets under management, attracted the most among its peers with inflows of USD$58 million last week. The Invesco WilderHill Clean Energy ETF (PBW) came second in terms of weekly flows having netted USD12 million inflows for the same week.

iShares Global Clean Energy UCITS ETF (INRG)

Launched on July 7th, 2007, iShares Global Clean Energy UCITS ETF (INRG) is the world’s largest Clean Energy ETF with USD$6.6 billion in AUM. This passively managed ETF is designed to reflect the performance of the S&P Global Clean Energy Index through a combination of capital growth and income on the fund’s assets. It invests in businesses involved in clean energy production or the provision of clean energy technology from both emerging and developed economies. It follows an ‘ESG Thematic’ investing strategy where it excludes companies exceeding a certain carbon emission threshold set by the index. INRG is suitable for investors looking to express a mid to long term view on the clean energy sector. It is geographically diversified holding 45.11% of the total portfolio in the United States, 12.26% in China, and 10.84% in Denmark with the rest spread across 9 countries. Similarly, the fund is diversified on a sector level allocating 40.06% of assets to Utilities, 32.81% to Information Technology, 23,89% to Industrials, 1.59% to Energy, 1.36% to Materials. INRG has a TER of 0.65%, with a distributing dividend policy.

Invesco WilderHill Clean Energy ETF (PBW)

Invesco WilderHill Clean Energy ETF (PBW) was released on March 3rd, 2005 with assets under management of USD$1.2 billion, at the time of writing. PBW is a passively managed ETF that tracks the performance of the WilderHill Clean Energy Index by normally investing at least 90% of its total assets in common stocks from the index, namely companies engaged in the business of advancement of cleaner energy and conservation. The ETFs buys companies that are publicly listed in the United States, hence its geographical concentration. However, it is more diversified on a sector level holding 45.50% of its portfolio in Industrials, 18.34% in Consumer Discretionary, 17.75% in Information Technology, 9,74% in Materials, 6.46% in Utilities, 1.22% in Financials, and 1.02% in Energy. PBW is slightly cheaper than INRG charging a TER of 0.61% while following a distributing dividend policy.

Data for this article is as of July 29th, 2022.