Solar, Wind, Hydro: A Guide to Alternative Energy ETFs

From TAN to ICLN, options are growing for those seeking to invest in renewable and clean energy ETFs.

As the world increasingly turns to sustainable solutions to combat climate change, alternative energy has emerged as a key investment theme. For investors looking to capitalize on this trend, alternative energy exchange-traded funds provide a practical way to gain exposure to the clean energy sector and beyond. 

This guide will delve into what alternative energy ETFs are, their benefits, notable options in the market, and important factors to consider before investing.

Defining Alternative Energy

Alternative energy refers to energy sources that are renewable and sustainable, as opposed to fossil fuels. Key components of alternative energy include:

• Solar Energy: Generated using solar panels and photovoltaic cells.
• Wind Energy: Produced by wind turbines harnessing the wind's kinetic energy.
• Hydropower: Generated from flowing water, typically in dams.
• Geothermal Energy: Derived from the earth's internal heat.
• Biomass Energy: Produced from organic materials, including plant and animal waste.

Benefits of Investing in Alternative Energy ETFs

Alternative energy ETFs offer investors a range of potential benefits, including diversification, liquidity, alignment with values, and more:

1. Diversification

Alternative energy ETFs typically hold a basket of stocks from various companies involved in different aspects of the sector. This diversification can reduce the risk associated with investing in a single company.

2. Liquidity

ETFs trade on exchanges, allowing investors to buy and sell shares throughout the trading day at market prices, similar to stocks. This provides flexibility and quick access to funds.

3. Cost-Effectiveness

Many alternative energy ETFs have lower expense ratios compared to mutual funds. This means that a smaller portion of your investment goes toward management fees, allowing more of your money to work for you.

4. Transparency

ETFs regularly disclose their holdings, enabling investors to see which companies they are invested in. This transparency helps in making informed investment decisions.

5. Alignment with Values

Investing in alternative energy aligns with a commitment to sustainability and responsible investing. Many investors are increasingly looking to support industries that contribute positively to the environment.

Notable Alternative Energy ETFs

Here are five notable ETFs targeting the alternative energy industry. For a full list of funds, check out etf.com’s Renewable Energy ETFs Topics Page. 

Invesco Solar ETF

The Invesco Solar ETF (TAN) focuses on companies in the solar energy industry, providing exposure to solar manufacturers and installers.

• Expense Ratio: 0.67%
• Top Holdings: First Solar, Enphase Energy, Nextracker

iShares Global Clean Energy ETF

The iShares Global Clean Energy ETF (ICLN) invests in global companies producing energy from renewable sources, providing a diversified approach.

• Expense Ratio: 0.41%
• Top Holdings: First Solar, Enphase Energy, Iberdrola

First Trust Nasdaq Clean Edge Green Energy Index Fund

The First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN) tracks the Nasdaq Clean Edge Green Energy Index and focuses on U.S. companies in the clean energy sector.

• Expense Ratio: 0.59%
• Top Holdings: Tesla, First Solar, Enphase Energy

Global X Renewable Energy Producers ETF (RNRG)

This ETF provides exposure to companies that produce energy from renewable sources, including solar, wind, and hydropower.

• Expense Ratio: 0.65%
• Top Holdings: Orsted, EDP Renovaveis, Centrais Eletricas, Brasileiras

SPDR S&P Kensho Clean Power ETF

The SPDR S&P Kensho Clean Power ETF (CNRG) aims to track companies involved in the development and production of clean energy technologies.

• Expense Ratio: 0.45%
• Top Holdings: Sunnova Energy International, GE Vernova, Sunrun

Key Considerations for Investors

1. Volatility and Risk

The alternative energy sector can be highly volatile. Factors such as government policies, technological advancements, and market competition can influence stock prices. Investors should be prepared for price fluctuations and conduct thorough research before investing.

2. Policy and Regulation

Government policies play a crucial role in the growth of alternative energy. Incentives like tax credits and renewable energy mandates can significantly affect profitability. Staying informed about legislative changes is essential for investors.

3. Technological Advancements

Innovation drives the alternative energy sector. Breakthroughs in technology can enhance efficiency and reduce costs, affecting stock performance. Understanding how companies are positioned to adapt to new technologies is vital.

4. Geographic Exposure

Many alternative energy ETFs invest globally. This geographic diversification can offer benefits, but it also comes with risks related to political stability and regulatory environments in different regions.

5. Long-Term Outlook

The alternative energy sector is expected to grow as countries commit to reducing carbon emissions. Investors should adopt a long-term perspective, as the sector may experience short-term volatility.

Strategies for Investing in Alternative Energy ETFs

1. Dollar-Cost Averaging

This strategy involves regularly investing a fixed amount in an ETF, regardless of its price. Over time, this can help mitigate the effects of market volatility.

2. Thematic Investing

Focus on specific themes within alternative energy, such as solar technology, energy storage, or electric vehicles. By targeting particular niches, investors can capitalize on trends within the broader market.

3. Environmental, Social, and Governance (ESG) Investing

Consider ETFs that prioritize ESG criteria. This approach aligns investments with personal values while potentially enhancing long-term returns.

Conclusion

Investing in alternative energy ETFs provides a compelling opportunity to participate in the transition to a more sustainable future. With a variety of options available, investors can tailor their portfolios to align with their financial goals and ethical values. By understanding the benefits, notable ETFs, and key considerations, investors can make informed decisions in this dynamic sector.

As the world continues to prioritize renewable energy, alternative energy ETFs are likely to play a critical role in investment portfolios focused on sustainability. Whether you're an environmentally conscious investor or simply looking to capitalize on growth opportunities, alternative energy ETFs offer a pathway to engage with the future of energy while potentially reaping financial rewards.