Top renewable energy ETFs for 2022Matthias Krey
Investing in renewable energy has never been more relevant. You may intend to invest in green energy to help prevent climate change or purely for returns. Either way, hang in to learn what the top renewable energy ETFs in 2021 were – and if this this a good time to invest in renewable energy ETFs.
But first, let’s take a look first at why renewable energy is such a megatrend in investing.
The investment case for renewable energy
Everybody knows that burning fossil fuels like coal, oil and natural gas is the main cause of global warming. At the global climate conference (COP26) in Glasgow in November 2021, the world leaders confirmed that global warming is to be limited to 1.5°C. The common goal of all countries highlighted in Glasgow was a 45% cut in global emissions by 2030 and to achieve net zero by 2050. Renewable energy plays an overarching role in these plans.
The US and the EU pledged to significantly ramp up renewable power capacity. Let’s consider the case of wind energy. The EU will need to double efforts and add 30,000 megawatts of new wind power per year according the European Wind Energy Association. The Biden administration wants to massively support U.S. offshore wind and add a capacity of 30,000 megawatts by 2030, while continuing to grow the capacity on land. In the EU, the newly formed German government has come forward with a big programme for stimulating further wind energy investments. Both the US and Germany also have ambitions plans for solar power increases.
Renewable power expansion plans until 2030: Germany and US in comparison (in gigawatts)
|Germany||US||World installed capacity in 2020|
|Offshore wind capacity||22||30||34|
Clearly, the growth projections have to be taken with a grain of salt as they are based on political targets. But even if only 50% of the targets are met, the German and the US government plans will provide a solid boost to renewable energy companies’ sales during the next decade.
Overview of renewable energy ETFs
Here is a list of the leading renewable energy ETFs in the market. You can see how many and what type of stocks are included in the ETF.
|Name ETF||Year of establishment||No. of stocks in ETF||What’s in it?||More details|
|First Trust Global Wind Energy ETF||2008||48||Majority are “pure-play” wind companies with top countries Denmark, Canada, and Spain.||https://www.ftportfolios.com/retail/etf/etfsummary.aspx?Ticker=FAN|
|Invesco Solar ETF||2008||54||Mostly global “pure-play” solar energy companies, mainly in the U.S. and China.||https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=TAN|
|Renewable energy producers ETF||2015||44||Renewable energy companies across wind, solar, hydro, geothermal, and biofuels across a large range of countries||https://www.globalxetfs.com/funds/rnrg/|
|HANetf Solar Energy ETF||2021||45||Majority are “pure-play” solar energy companies, mostly in the U.S. and China.||https://www.hanetf.com/product/18/fund/solar-energy-ucits-etf|
How did the ETFs perform in 2021?
Despite the hype following the US presidential election in January and February, 2021 was not a good year for the average renewable energy stock. On a year-on-year basis all ETFs except for HANetf Solar Energy are in the red. Losses range from -12% to -23%. The HANetf Solar Energy is now more or less where it started at its launch in June 2021.
There are three main reasons for the not so impressive performance in 2021:
- Rising interest rates increase the cost of capital for renewable energy projects, as they have high up-front costs that are usually financed through debt. Higher interest rates mean lower future cash flows, so investors in renewables stocks are very sensitive to the expectation of higher interest.
- Renewable energy firms have a cost problem due to soaring input prices, mainly steel and copper. As the market is fairly competitive and higher prices for wind turbines and solar plants are not easily enforceable, profit margins decrease.
- The renewable energy sector partly depends on government support programmes. It therefore remains exposed to uncertainty due to public support such as stimulus delays or incentives-cuts announcements. Cuts happened in December in 2021 in California for solar energy systems. And U.S. Senator Joe Manchin, a Democrat from coal-rich West Virginia, opposing President Joe Biden’s Build Back Better Act.
How are renewable energy ETFs valued end of 2021?
It is fair to say that at large renewable stocks have been in a long-term bull market over the last years due to the megatrends climate change and ESG. People around the world became increasingly aware of the need for a greener economy and environmentalism in general. But this can pose a risk for future returns relative to the average market, at least in the short term. Below you can see the price to earnings (PE) ratio of the three renewable energy ETFs for which they are available:
- Invesco Solar ETF: 54
- First Trust Global Wind Energy ETF: 24
- Renewable Energy Producers ETF: 35
The indices NASDAQ 100 and S&P 500 both have current PE ratios of 30. The Invesco Solar ETF and the Renewable Energy Producers ETF in comparison seem valued fairly high. This could indicate a high probability of lower returns for those ETFs as compared to other investment alternatives.
What is the climate impact of energy ETFs?
The majority of stocks included in the four renewable energy ETFs are indeed climate pure-play companies. Most of them derive 100% of their revenue from products and services that help to solve the climate crisis and according to our methodology qualify as Pure Climate Stocks. But, the First Trust Global Wind Energy ETF and the Renewable Energy Producers ETF each include two companies that also operate fossil-fuel fired power plants: China Longyuan Power Group Corporation Limited and Ørsted. Both companies make up around 10% across all stock positions in the ETF. ( For more details see our blog here ). We find this problematic for those wanting to invest only in Pure Climate Stocks.
Are renewable energy ETFs a buy for 2022?
A renewable energy ETF is an opportunity to capture big chunks of the renewable energy sector in one single investment. But you may want to think twice, if they are the right investment for you. Firstly, because they seem relatively high valued at this moment, which can limit your return potential. Secondly, they may contain companies that are not climate pure plays and therefore may not meet your ethical investment criteria. That is why my own climate investment portfolio only consists of individual Pure Climate Stocks, with no ETFs.
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