How to go green with clean energy ETFs

Solar panels
Rebecca Cattlin
By : ,  Financial Writer

What are green energy ETFs?                       

Green energy ETFs are investment vehicles that track the top companies in the field of clean or renewable energy. Green ETFs have become one of the main ways for sustainably minded investors to avoid contributing to climate change.

The move from traditional energy companies, which have relied on fossil fuels, toward green energy producers is regarded as a ‘mega trend’. As governments and other bodies boost their investment in clean energy to meet carbon reduction commitments – and green companies benefit from the influx of capital – it’s likely to captivate financial markets for the foreseeable future.

Green energy has already been a conversation for the last couple of decades, so unlike other major trends, it has ambled along at quite a slow pace. But the shift still creates the opportunity to speculate on both the mega trend and the short-term volatility that inevitably comes from a growing industry. As new technologies are released and companies enter the market, excitement can capture the public’s attention, and push share prices higher and higher. But share prices are equally sensitive to even the smallest bit of negative news, which can create shorting opportunities.  

As a result, it’s important to keep an eye on your positions and have risk management measures in place, such as stop losses.

Types of green ETFs

Green energy ETFs can encompass a lot of different businesses. At a top level, you’ve got the entire clean energy industry, which can then be broken down into segments such as solar, wind, hydro and nuclear.

Let’s take a look at each type of green ETF:

  1. Clean energy ETFs
  2. Solar energy ETFs
  3. Wind energy ETFs
  4. Nuclear energy ETFs

Each fund will have different criteria for selecting companies, and have its own weighting methodology, so you’ll need to understand which businesses have the most influence on the performance of your fund.

1. Clean energy ETFs

Clean energy ETFs cover businesses across the alternative or renewable power sector – including component manufacturers, operators, and producers.

With City Index, you can trade the following clean energy ETFs:

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)

The First Trust NASDAQ Clean Edge Green Energy Index Fund is focused on companies involved in the manufacturing, development, distribution and installation of technologies, which gives a far greater exposure to clean energy than funds focused on production or distribution alone.

The ETF seeks to replicate the results of the Nasdaq Clean Edge Green Energy Index, which is a market capitalisation-weighted index of the top companies in the industry.

The top constituents of the index, and subsequently the top holdings of the First Trust NASDAQ Clean Edge Green Energy Index Fund are:

  1. Albemarle Corp (9.52%)
  2. Tesla (8.95%)
  3. ON Semiconductor Corp (7.92%)
  4. Enphase Energy (7.46%)
  5. NIO (5.88%)

iShares Global Clean Energy (ICLN)

The iShares Global Clean Energy ETF holds shares of global companies that produce energy from solar, wind and other clean sources. It focuses on manufacturers of wind turbines and solar energy inverters, as well as businesses that operate the farms and facilities.

ICLN is suitable for traders looking to get exposure to companies involved in producing renewable energy. The fund is highly rated by MSCI for ESG factors, receiving an AAA rating – this makes it one of the most highly rated ETFs in the category.

As of March 2022, the iShares Global Clean Energy ETF has 76 holdings. The top five are:

  1. Enphase Energy (9.13%)
  2. Vestas Wind Systems (7.78%)
  3. Consolidated Edison (6.26%)
  4. Orsted (6.05%)
  5. SolarEdge Technologies (5.68%)

The top 10 companies make up 50% of the ETF, which means the fund is heavily weighted toward their performance.

Invesco Global Clean Energy (PBD)

The Invesco Global Clean Energy ETF is based on the WilderHill New Energy Global Innovation Index. The ETF invests at least 90% of its assets based on the securities in the index.

The WilderHill Clean Energy index focused on companies listed on US stock exchanges that are in the business of advancing clean energy and conservation.

As of March 2022, the Invesco Global Clean Energy ETF has 125 holdings. The top five are:

  1. Lithium Americas (1.07)
  2. Lordstown Motors (1.06%)
  3. Yadea (1.03%)
  4. Tritium (1.02%)
  5. L&F (0.99%)

Despite slight differences in weighting, the ETF is generally considered to have an ‘equal-weight’ strategy. This gives you a broader exposure to the clean energy industry.

2. Solar energy ETFs

Solar energy ETFs focus entirely on companies in the solar industry – whether they’re manufacturers of panels and electrical components, operators of farms or installation firms.

A prime example is the Invesco Solar ETF, which invests in a basket of the top solar stocks, based on the MAC Global Solar Energy Index. It’s geographically diverse – only about half the companies are US-listed – and is also distributed across sectors including IT, utilities, industrials and financials.

As of March 2022, the Invesco Solar ETF has 43 holdings. The top five are:

  1. Enphase Energy (11.58%)
  2. SolarEdge Technologies (9.85%)
  3. First Solar (6.61%)
  4. GCL-Poly Energy (5.93%)
  5. Xinyi Solar (5.85%)

3. Wind energy ETFs

Wind energy ETFs provide exposure to groups of companies that are actively engaged in some aspect of the wind energy industry, which could be:

  • Developing or managing a wind farm
  • Producing or distributing electricity generated by wind power
  • Designing, manufacturing or distributing machinery or materials

Not all wind energy ETFs contain companies that are entirely focused on wind, as a lot of businesses have diversified operations that include wind.

For example, the First Trust Global Wind Energy ETF is comprised of both pure-play wind companies that generate at least 50% of their revenue from wind-related activities (comprising 60% of the ETF) and diversified companies that only have some involvement in the industry (40% of the fund).

The First Trust Global Wind Energy ETF is geographically diverse too, so it provides a global exposure to the industry.

The top holdings of First Trust Global Wind Energy as of May 2022 include:

  1. Northland Power (7.55%)
  2. China Longyuan Power Group (7.17%)
  3. Orsted (7.01%)
  4. EDP REnovaveis (6.16%)
  5. Vestas Wind Systems (6.16%)

4. Nuclear energy ETFs

The inclusion of nuclear energy as a ‘clean’ or ‘renewable’ energy is somewhat up for debate. It is a zero-emission energy source, and very waste efficient, but it’s technically recyclable, not renewable. Nuclear energy is actually thought to produce more electricity on less land than any other ‘clean’ energy source. A lot of government programmes have shown interest in nuclear fission while other renewable capacity is being built.

Nuclear energy ETFs invest in companies involved in mining uranium – which is split to produce nuclear energy – building power facilities, generating electricity and distribution.

The Global X Uranium ETF is the largest nuclear fund in terms of net assets, with a total of $1.6 billion. The fund gives exposure to a broad range of companies involved in mining and production – including businesses that manufacture equipment for the industry.

Global X Uranium has 49 holdings, the top five are:

  1. Cameco Corp (20.23%)
  2. Sprott Physical (7.32%)
  3. NAC Kazatomprom (6.54%)
  4. Nexgen Energy (5.34%)
  5. Paladin Energy (4.30%)

The ETF is geographically diverse, although the majority of companies are Canada-based.

Trade green energy with City Index

You can trade a range of clean energy ETFs with City Index, in just a few quick steps:

  1. Open a City Index account, or log in if you’re already a customer
  2. Search for the market you want to trade in our award-winning platform
  3. Choose your position and size, and your stop and limit levels
  4. Place the trade

Alternatively, you can practise trading market downturns in a risk-free demo account.

You can also trade our proprietary Green Index, which tracks the market performance of the top 30 North American publicly-listed companies investing in alternative energy sources – including Xylem, Brookfield Renewable and First Solar.

Learn more about the Green Index.

 

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