The current energy shock may be bringing up memories of the 1970s energy crisis.
That era ushered in improved energy efficiency that’s paid dividends for decades, and current high prices may accelerate moves to renewable energy and energy conservation, offering opportunities for investors in the green building space, HVAC, insulation, even smart grid over the long term.
Rene Reyna, head of thematic and specialty product strategy for ETF and index strategy at Invesco, says that how much the current conflict in Ukraine affects the energy transition is debatable, but there is capital investment commitment to the renewable energy transition.
While there are no specific energy-efficiency exchange-traded funds, advisors may find suitable ETFs in the clean energy space and other ETFs that consider efficiency and smarter use of natural resources as a theme.
How To Think About Energy Efficiency
Aniket Ullal, head of ETF data and analytics at CFRA, suggests there are four ways to approach this theme.
The most obvious way is to look at clean energy production and services, which encompasses the typical renewable energy names such as First Solar and Sunrun.
This theme is crowded with ETFs, including narrow-based ideas such as the Invesco Solar ETF (TAN), to broader takes such as the iShares Global Clean Energy ETF (ICLN) and the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN). These ETFs typically have around half of their weight in the utilities sector, and about 25% in industrials and 15% in technology, Ullal points out.
Although it’s not marketed as clean energy, the VanEck Low Carbon Energy ETF (SMOG) falls under this theme when looking at it from a sector standpoint. Ullal notes it has 40% utilities exposure, 25% industrials and 15% technology.
“That’s almost exactly the kind of industry exposure ICLN has,” Ullal said, adding a quick review of SMOG and ICLN also shows a fair amount of holdings overlap.
The industrials sector is a “picks and shovels” approach to the energy-efficiency theme, Ullal notes. One of the newer ETFs is the JPMorgan Climate Change Solutions ETF (TEMP), an actively managed fund targeting sustainability in transportation, construction, food and water, energy and waste reduction.
TEMP has 50% industrials and 15% utilities exposure, with much less exposure to clean energy producers and more to well-established companies, such as power management firms Schneider Electric and Eaton Corp, and HVAC systems firms Carrier Global and Johnson Controls.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
The First Trust NADSAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) has a similar profile, he says, but it is narrowly focused on smart-grid technology. “I would call GRID more of an infrastructure play than a clean-energy play,” he said, noting its biggest holdings include Eaton Corp and ABB.
A third way to think about energy efficiency is through real estate, Ullal suggests, which also could be an inflation hedge as well.
The main example is the Invesco MSCI Green Building ETF (GBLD), which focuses on the efficiency of the entire sustainable building value chain. Two other REIT ETFs that rank highly in MSCI’s ESG ratings are the SPDR Dow Jones International Real Estate ETF (RWX) and the WisdomTree Global ex-U.S. Real Estate Fund (DRW).
Reyna points out that reducing carbon emissions from buildings is key to the world meeting net-zero 2050 goals, a target to completely negate the amount of greenhouse gases produced by 2050. In some markets, anywhere from one-quarter to one-third of greenhouse gas emissions are from the building sector.
Peter Krull, CEO of Earth Equity Advisors, says he likes the idea of energy-efficient REITs as an indirect route toward energy efficiency. Currently he owns a green building mutual fund, but he says he would look at the Green Building ETF, GBLD, while noting its short track record.
The final way to consider energy efficiency is to take a multisector approach, Ullal suggests, looking at ETFs that select companies with a lower carbon footprint. It has more traditional equity exposure, with selected companies more likely to benefit from a low-carbon environment.
Among the biggest in that space are the iShares MSCI ACWI Low Carbon Target ETF (CRBN), with $1.1 billion in assets under management. Another multisector fund that includes energy efficiency and limiting natural resource use is the Invesco MSCI Sustainable Future ETF (ERTH).
Mind The Holdings
John Ingram, chief investment officer at Crestwood Advisors, reminds advisors that they need to dig into these ETFs if they’re looking for exposure to a theme.
His firm once owned ERTH in a small allocation for a few years, noting through 2020 “it was on fire.” However, after running an analysis at the time, he learned about 20% of the holdings had no earnings, and another 40% had price-to-earnings ratios of 45 or higher, which led to some questions at his firm.
“Would these be any companies we would own in our stock portfolio? The answer's no. So we ended up selling ERTH and reallocating into another large cap ESG index [mutual] fund,” he said.
Daniel Milan, managing partner of Cornerstone Financial Services, has owned GRID for two years in all of his firm’s ETF model portfolios as an environmentally efficient infrastructure play.
Previously he owned QCLN, and is considering adding it back because of the focus on sustainability and reducing energy use. Russia’s invasion of Ukraine has renewed views of the geopolitical risks of oil and the inflationary risk.
Krull is also a fan of QCLN and uses it in his portfolios: “There are a lot of clean energy ETFs out there … QCLN is the best of the bunch from a purity perspective. You don’t have a lot of crossover of fossil fuel companies, and from a holdings perspective, it’s pretty diverse.”
Although the fund is down 20% this year, he says that fits with the wider market’s weakness. For an advisor interested in energy efficiency, he thinks it fits the bill.
“In terms of energy efficiency, energy generation and transportation, it really checks all the boxes. It also has smart metering, which is such an important part when we talk about energy efficiency,” Krull said.
|Ticker||ETF||Exp Ratio||AUM||Inception||Segment||12-Mo Return|
|ICLN||iShares Global Clean Energy ETF||0.42%||$5.21B||6/24/2008||Equity: Global Renewable Energy||-20.68%|
|TAN||Invesco Solar ETF||0.69%||$2.54B||4/15/2008||Equity: Global Renewable Energy||-28.98%|
|QCLN||First Trust NASDAQ Clean Edge Green Energy Index Fund||0.60%||$2.08B||2/8/2007||Equity: U.S. Renewable Energy||-23.59%|
|CRBN||iShares MSCI ACWI Low Carbon Target ETF||0.20%||$1.11B||12/9/2014||Equity: Global Low Carbon||-0.55%|
|GRID||First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund||0.63%||$685.35M||11/17/2009||Equity: Global Infrastructure||1.18%|
|RWX||SPDR Dow Jones International Real Estate ETF||0.59%||$609.14M||12/14/2006||Equity: Global Ex-U.S. Real Estate||-0.98%|
|ERTH||Invesco MSCI Sustainable Future ETF||0.55%||$395.26M||10/24/2006||Equity: Global Environment||-14.30%|
|SMOG||VanEck Low Carbon Energy ETF||0.62%||$260.29M||5/3/2007||Equity: Global Low Carbon||-13.00%|
|DRW||WisdomTree Global ex-U.S. Real Estate Fund||0.58%||$51.33M||6/5/2007||Equity: Global Ex-U.S. Real Estate||-11.16%|
|TEMP||JPMorgan Climate Change Solutions ETF||0.49%||$21.97M||12/13/2021||Equity: Global Low Carbon||-|
|GBLD||Invesco MSCI Green Building ETF||0.39%||$4.41M||4/22/2021||Equity: Global Environment||-|
Source: FactSet; data as of 3/18/2022