Why Global Sustainable Energy Is Right for Your Portfolio
Sustainable Energy Could Become a $1+ Trillion Market by 2022
The market for sustainable energy is expected to grow at a 7.5 percent compound annual growth rate to surpass $1 trillion over the coming years, driven by the growing world economy, greater incentives for renewables, and greater cost competitiveness over time.
In this article, we will look at how global sustainable energy can play a role in a diversified international portfolio.
Sustainable Energy Outlook
The world economy is expected to nearly double over the next 20 years with a 3.4 percent average annual growth rate, according to BP’s 2017 Energy Outlook, which will drive a 30 percent increase in energy demand over the forecast period.
Crude oil may be the greatest source of primary energy due to sizable automobile demand, but the only two primary energies predicted to gain market share over the next 20 years are gas and sustainable energy. Sustainable energy, including wind, solar, geothermal, biomass, and biofuels, are expected to grow at a 7.1 percent annual pace to surpass nuclear and hydroelectric power at about 10 percent of total primary energy usage by 2035.
The European Union is expected to continue leading the way in sustainable energy with the greatest support for solar and other renewables, but China will be the biggest source of growth by adding more power than the E.U. and U.S. combined. This growth is expected to be driven by increasing cost-competitiveness of both solar and wind relative to conventional source of energy like crude oil, coal, and even cleaner gas power.
In dollar terms, Occams Research projects that the global sustainable energy industry will grow at a 7.5 percent compound annual growth rate to $1.02 trillion by 2022.
The sheer size of the market and compelling growth rate make it an important addition to international investor portfolios.
Investing in Sustainable Energy
Most investors already have some exposure to renewable energy in their portfolios. After all, most international exchange-traded funds (ETFs) and mutual funds are weighted by market capitalization and the market is already approaching $1 trillion in size.
But, there are many reasons that investors may want to increase exposure to sustainable energy within their portfolios, such as ESG (environmental, social, governance) directives or for greater alpha.
The good news is that there are many easy ways to invest in sustainable energy through both ETFs and mutual funds targeting the sector around the world.
Sustainable Energy ETFs
- Guggenheim Solar ETF (TAN): A solar-focused fund with 36 percent exposure to North America, 24 percent exposure to Europe, and 24 percent exposure to Asia.
- iShares Global Clean Energy ETF (ICLN): A diversified fund with 25 percent exposure to the Asia-Pacific, 24 percent exposure to North America, and 16 percent exposure to Asia.
- First Trust ISE Global Wind Energy Index Fund (FAN): A wind-focused fund with 69 percent exposure to Europe, 12 percent exposure to the Asia-Pacific, and 11 percent exposure to North America.
- VanEck Vectors Global Alternative Energy ETF (GEX): A diversified fund with 53 percent exposure to North America, 30 percent exposure to Europe, and 6 percent exposure to Asia.
- PowerShares Global Clean Energy Portfolio ETF (PBD): A diversified fund with 33 percent exposure to Europe, 31 percent exposure to North America, and 18 percent exposure to Asia.
Sustainable Energy Mutual Funds
- Guinness Atkinson Alternative Energy (GAAEX): A non-diversified fund that invests in both domestic and foreign companies in the alternative energy sector.
- Waddell & Reed Energy (WEGAX): A diversified fund that invests in both conventional and alternative energies with a focus on returns.
- Firsthand Alternative Energy (ALTEX): A small fund that invests in alternative energy production or technologies, including names like Solar City.
Global sustainable energy may be a fast-growing industry that’s well-positioned for the future, but there are many risk factors that international investors should consider.
For example, the average cost of solar panels have fell nearly 50 percent over the five-year period leading up to 2015, according to Cost of Solar.
China was responsible for a significant drop in photovoltaic panel prices after experiencing a significant build-up and dumping product in the U.S. and E.U., but soft cost reductions have also been on the decline due to increases in system size and module efficiency. These dynamics led to troubles for the solar industry.
Most sustainable energy projects also continue to rely on government support through tax credits, grants, and other financial measures. In some cases, these measures may be reduced or removed, which leads to a relatively high level of political risk compared to other sectors.
For example, President Donald Trump has been critical of sustainable energies and supportive of conventional primary energy sources like coal. These sentiments could lead to incentives for competing forms of energy or reduced incentives for sustainable energies.
The Bottom Line
The market for sustainable energy is expected to grow at a 7.5 percent compound annual growth rate to surpass $1 trillion over the coming years, driven by the growing world economy, greater incentives for renewables, and more cost-effectiveness over time. International investors may want to consider diversifying into the space to capitalize on these trends using any number of ETFs or mutual funds targeting the sector.