The 3 Best Clean Energy ETFs for 2021
Learn More About Clean Energy ETFs and Which Funds to Buy Now
A clean energy ETF can be a smart investment choice if you're interested in being socially responsible or if you want to buy into a growth industry. But sector funds like these aren't right for every investor. You should understand what clean energy ETFs are. These are some of the best to buy right now.
What Are Clean Energy ETFs?
Clean energy ETFs are exchange-traded funds that mostly invest in the stocks of companies that are involved in alternative energy sources, such as solar, wind, or water. These funds track the performance of an underlying index that comprises stocks that are involved in clean and renewable energy sources.
Companies and energy regulators use clean energy to power electric cars, increase energy storage, and provide electricity for state and local grids.
Examples of stocks that may be holdings in this type of ETF include Tesla (TSLA), NextEra Energy (NEP), and Enphase Energy, Inc (ENPH).
The Outlook for Clean Energy
Now may be one of the best times to invest in clean energy ETFs. The U.S. Department of Energy has stated that the clean energy industry generates hundreds of billions of dollars in economic activity, with rapid growth potential.
The stocks of these companies could see a great deal of growth in the long term when they're combined with an increasing interest in alternative energy resources. Rising oil prices and more states adopting clean energy benchmarks factor in as well.
But keep a long-term outlook, because investments that focus on niche areas of the market can see some extreme short-term fluctuations in price. These have average annualized returns that range from low-single-digit gains to low-single-digit declines in the past 10 years.
You should expect to see some volatility for the coming years, because the clean energy sector is somewhat new. Past returns have moved between single-digit gains and losses.
Best Clean Energy ETFs to Buy Now
Clean energy ETFs share similar goals. They invest in many of the same sources of energy, but they don't all share the same holdings. Each fund is unique in how it invests.
We've generated criteria that we use to find the best clean energy ETFs. It’s often wise to buy ETFs that have a multi-year track record. They should have high relative assets under management (AUM). More than $200 million is common among the top clean energy funds.
These are all clean energy ETFs with high AUMs relative to competing funds, as well as a track record of at least 12 years.
iShares Global Clean Energy (ICLN)
This fund tracks the S&P Global Clean Energy Index, which is composed of 41 clean and renewable energy stocks from around the world. Top holdings include ENPH, SolarEdge Technologies, Inc (SEDG), and Vestas Wind Systems (VWS). ICLN’s inception date is June 24, 2008. Its AUM is $667.5 million. Expenses are 0.46%, or $46 for every $10,000 invested.
Invesco Wilderhill Clean Energy ETF (PBW)
PBW tracks the WilderHill Clean Energy Index, which includes 39 stocks of companies involved in clean energy and conservation. Top holdings include ENPH, TSLA, and NOVA. The inception date for PBW is March 3, 2005. Its AUM is $322.1 million. Expenses are 0.71%.
First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)
This fund tracks the NASDAQ Clean Edge Green Energy Index. This index includes a mix of U.S. and Canadian companies that are involved in the clean energy sector. Top holdings include TSLA, ENPH, and Brookfield Renewable Partners (BEP). The inception date for QCLN is February 8, 2007. AUM is $228.5 million. Gross expenses for this fund are 0.65%.
The Bottom Line
Clean energy ETFs can be used wisely as a part of a broadly diversified portfolio, but investors are cautioned not to commit more than 5% of their assets to one concentrated sector. The clean energy sector may have a bright future, but the industry is still new and untested. Market risk and price volatility may be higher than with the broad market indices.
Disclaimer: The information on this site is provided for discussion purposes only and should not be taken as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.