Just in case you’ve been avoiding all news flow recently, there’s probably no hotter investing space right now than renewable energy. Fortunately, there’s already a plethora of options available to investors looking to tap into the megatrend, including exchange-traded funds (ETFs). Here are two I already own and which I’d feel comfortable adding more of in the years ahead.
2 ETFs to buy
As it sounds, iShares Global Clean Energy ETF (LSE: INRG) invests in companies that have a finger or two in the clean energy production pie. Alternatively, some holdings may supply the equipment or technology that enables this energy to be generated.
All told, this ETF has 76 holdings. That’s not exactly concentrated but nor does it present as being overly diversified. This is an important consideration for me. After all, the greater the number of stocks held, the less impact each individual stock can have on returns. As such, I think INRG strikes a nice balance between risk and reward.
Another positive to this fund is the geographical spread. Companies held come from both developed and emerging markets (although 43% are based in the US). UK-listed SSE features in the portfolio, as do firms like and solar power company Enphase Energy.
A second passive fund I’m holding as part of my renewable energy strategy is WisdomTree Battery Solutions ETF (LSE: CHRG). As it sounds, this fund is more focused on energy storage. According to WisdomTree, battery technology has the potential to “significantly transform industries, services, labour and consumption“. Unsurprisingly, the electric vehicle revolution will form a major part of this.
Again, the geographical spread of this ETF is reassuring. By contrast to INRG however, almost 30% of holdings are based in China. Another 20% and 12% are based in the US and Japan respectively.
Some positives
As you might expect, there are advantages and disadvantages to playing the renewable energy theme via passive ETFs. For me, one clear benefit of using trackers is their relatively low cost. The less I give back in management fees, the better my eventual returns will be thanks to compounding.
The iShares and WisdomTree funds have total expense ratios of 0.65% and 0.40% respectively. Neither strikes me as unreasonable considering these are thematic funds. Moreover, the CHRG share price is up 50% over the last 12 months.
It’s not just about the cost. I don’t claim to have specialist knowledge of the renewable energy space. This lack of investing ‘edge’ suggests buying a diversified fund that tracks indices created by experts in the field would be the more rational move.
Then again…
On the flip side, both funds could still prove volatile. Growth companies in hot areas usually trade on high valuations. And, regardless of renewable energy’s solid prospects, that could prove problematic in the event of a global economic wobble.
In direct conflict with what I’ve stated earlier, the ‘opportunity cost’ of holding these funds over specific shares is potentially very high if I can pick a winner. As the recent performance of Tesla has shown, buying an eventual market leader has the potential to generate life-changing returns. TSLA shares are up almost 2,800% since 2016.
The low/negligible yields from both ETFs also need to be borne in mind if I was looking to generate passive income. If that’s key, dividend-focused funds like these in this area might be more appropriate.
