It doesn’t seem over-the-top to say that renewable energy looks set to be one of the big investing themes of the next decade and beyond. In fact, I think stocks in this space have the potential to make retail investors very rich in over time. Millionaires, even.
Today, I’m looking at how Foolish investors might position themselves to reap the rewards.
Renewable energy goes mainstream
Thanks to concerns over global warming, the drive towards greener sources of energy has increased exponentially over the last few years. The pace of demand is only likely to accelerate further following Joe Biden’s recent US election win. After all, the Democrat made a commitment to clean energy a huge part of his campaign to secure the White House.
In sharp contrast to all this, oil stocks such as BP and Royal Dutch Shell have been out of favour for most of 2020 as a result of the pandemic. The FTSE 100 tankers have seen their share prices pummeled as a consequence of the huge reduction in travel hitting demand for oil. Junior oil stocks have fared even worse.
Now, I don’t doubt we could see the price of the slippery stuff recover strongly as some form of normality returns in 2021 and demand increases. Even so, I can’t help but think investors will miss out on bigger gains by remaining loyal to oil stocks. As much as BP and Shell are trying to improve their green credentials by reducing their carbon footprints, no one should assume this move will be easy or cheap.
No, I’m looking for companies that are already making strides in the renewable energy space.
Tap into the trend
UK retail investors certainly aren’t short of options when it comes to playing the theme.
Naturally, they could buy shares in individual companies. FTSE 100 member and catalyst system supplier Johnson Matthey is arguably one example. It has an interest in battery materials and hydrogen-related technology. Utility firm SSE plans to triple its renewable energy generation within the next 10 years. Lower down the market, there’s fuel-cell tech business Ceres Power Holdings and clean-fuel firm ITM Power.
An alternative to the above would be to buy an investment trust focused on this space. FTSE 250-listed Renewables Infrastructure Group owns wind and solar farms, as does Greencoat Renewables.
My option of choice however, is the geographically-diversified iShares Global Clean Energy UCITS ETF.
With a cheap ongoing charge relative to ‘active’ equivalents (0.65%), this exchange-traded fund has holdings in companies such as US hot stock Plug Power, home energy storage firm Enphase Energy and New Zealand electricity generator Meridian Energy.
A concentrated portfolio of 31 holdings could mean a volatile ride for holders. But owning this fund over stocks in specific renewable energy companies whose technologies aren’t necessarily proven feels far less risky. That said, returns should be turbocharged if this relatively small portfolio performs. Given the nailed-on industry tailwinds, I think the odds are in my favour.
As one might expect, the recent performance of the fund has been superb. In the year to date, iShares Global Clean Energy has almost doubled in value! I’m not expecting gains like this too often but I can’t see an end to this purple patch just yet.
I’m backing up the truck whenever I can.