Clean Break: Renewable ETFs offer energy investors long-term return opportunity
With conventional energy stocks and funds in steep decline in 2015 (the benchmark iPath S&P GSCI Crude Oil TR ETN (NYSE: OIL) is down 32.64 percent for the year, through November 3, 2015) the time is ripe for alternative energy funds to step into the breach and give long-suffering energy investors some love.
Unfortunately, that hasn’t happened yet. The benchmark clean energy exchange traded fund iShares Global Clean Energy (NASDAQ: ICLN) is down 5.14 percent over the same time frame (albeit performing more strongly than oil and gas funds.)
Another benchmark alternative energy fund, the First Trust NASDAQ CinEdge GrnEngy ETF (NASDAQ: QCLN) is faring worse than ICLN, but also better than OIL, falling 18.64 percent so far in 2015.
Both clean energy mainstay ETFs lag significantly in investor interest, compared to the big energy ETFs. Net assets in the GSCI Crude Oil fund are over $870 million, compared to a paltry $71 million for the iShares Clean Energy Fund, and $64 million for QCLN.
That equation could be changing, as investors who blend annual returns with altruism increasingly view renewable energy technologies as a viable alternative to oil and gas funds. They see “clean” energy, and equate it with natural resources such as water, sunlight, and wind, that won’t harm the environment and are all gaining a foothold in the global energy market.
What factors are impacting the alternative energy market, and what does that mean to global clean energy ETF investors heading into 2016? Here are three that top the list:
Don’t look for a direct comparison - Although it’s tempting to view alternative energy ETFs as a direct competitor to conventional oil and gas funds, it’s really not an apples-to-apples comparison. Renewables are actually more of a direct competitor to utilities companies, as they provide electrical power to consumers, whereas oil and gas are used by consumers primarily to fuel their vehicles, heat their homes and offices, and (for companies) move inventories around the world in shipping, train, trucking and air freight.
But do look for growth in alternative energy – According to the U.S. Energy Information Administration, clean energy will be the fastest growing power source through 2040. Specifically, “renewable electricity generation in the AEO2015 Reference case increases by 72 percent from 2013 to 2040, accounting for more than one-third of new generation capacity,” the EIA reports. “Additionally, Solar photovoltaic (PV) technology is the fastest-growing energy source for renewable generation, at an annual average rate of 6.8 percent. Wind energy accounts for the largest absolute increase in renewable generation and for 40.0 percent of the growth in renewable generation from 2013 to 2038, displacing hydropower and becoming the largest source of renewable generation by 2040.”
Public Policy is driving clean energy forward – The Obama Administration has aggressively pushed for clean energy initiatives. Back in August, the U.S. Environmental Protection Agency issued a mandate slashing CO2 emissions from American power plants. The federal government is now calling for CO2 reduction of 28 percent by 2025 and 32 percent by 2030, from 2005 levels. That leaves a big opening for clean energy providers – and a big opportunity for investors – going forward.
A downside in cheap oil prices – With crude oil trading at about $45 per barrel in early November, first-world economies that might normally give energy alternatives like wind and solar a closer look, are instead meeting their energy needs with conventional oil and gas. Take China, which showed early signs of climbing aboard the solar bandwagon in recent years. China has been the world’s largest producer of solar energy panels, but growth has dropped as the nation’s economy has slowed.
Green Energy ETFs Worth A Good Look
So where does an energy investor start looking on renewable energy ETFs? Start by thinking of renewable energy as a long-term play and start with the benchmark plays. That includes QCLN’s (48 holdings, with a strict U.S. clean energy slant, and heavy on technology stocks), and ICLN’s (30 holdings, and heavy on China and U.S. clean energy stocks.)
Also, kick some tires with PowerShares Global Clean Energy Portfolio (NYSEARCA:PBD). Its year-to-date performance is vastly superior to ICLN and QCLN, but its fees are a tick or two higher than its benchmark industry competitors.
With a worldwide push toward renewable energies, so-called “clean” ETFs, offer investors a decent alternative, performance-wise, to traditional oil and gas funds. Eventually, oil and gas prices will rise again, as they always do, and more global economies will turn toward alternative energies.
Consequently, have your ETF pick already in play when that happens. Mother Nature will thank you, and your accountant will, too.
Brian O’Connell is a a Doylestown, Pennsylvania-based freelance writer with 17 years experience covering business news and trends, particularly in the energy sector. A former Wall Street bond trader; O'Connell is an an author who’s placed two business books in "The Book of the Month Club" and is a business writer whose byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, The Street.com, Yahoo Finance, and Forbes.