The slow and steady transition to electric cars has been helpful in the collective fight to reduce our carbon footprint, but the real action is taking place in the industrial and commercial sectors that account for two-thirds of the world’s electricity usage, according to the International Renewable Energy Agency.
A fast-growing roster of 165 global industrial companies have signed on to be part of RE100, a consortium whose members have pledged to eventually power all of their operations with 100 percent renewable energy including solar, wind and hydro power.
It’s not simply a p.r. move, says Ron Pernick, founder of Clean Edge, a clean-tech research firm. “Their customers, board members and shareholders are all pushing for it,” he says.
Just as important, going green now has a strong business case to back it up. The levelized cost of energy, which accounts for the upfront development and ongoing operating costs of energy production, has begun to tilt in favor of renewables, Pernick says. As a result, any loss of eventual tax credits for clean power installations likely won’t impact the current momentum in this space.
And that momentum is reflected in the strong year-to-date share price performance among the basket of clean energy ETFs. The Invesco Solar ETF (TAN), for example, has rebounded more than 25 percent this year, compensating for a similarly sized loss in 2018. The erratic and volatile returns for this fund, which has $292 million in assets, highlights the challenge of a too-strict focus on one of the least profitable parts of this emerging industry. Steady erosion in solar panel pricing, which has crimped industry profits, has caused TAN to lose roughly 6 percent per annum over the past decade.
That’s why investors should consider a more diversified approach with funds such as the Invesco Cleantech ETF (PZD), which tracks an underlying index containing companies that, according to fund literature, reduce “the consumption of resources and the negative impact on the environment and public health.” The PZD fund, which has $165 million in assets and an expense ratio of 0.67 percent, has racked up average returns of 11.2 percent over the past decade.
Jason Bloom, director of global macro ETF strategy at Invesco, notes that PZD has gained sizable assets because “it is seen by many as one of the clearest pure plays on clean energy.” For example, he cites Intel as a firm that makes chips for solar panels, but otherwise has too much exposure to non-clean energy industries to warrant inclusion in the fund.
Invesco offers two other renewables-focused funds, both of which charge an expense ratio of 0.70 percent (as does the TAN fund). The Invesco WilderHill Clean Energy ETF (PBW) focuses on companies that are part of the solar, wind and hydro supply chain, while the Invesco WilderHill Progressive Energy ETF (PUW) takes a broader scope by targeting firms that offer “better efficiency, emission reduction, new energy activity, greener utilities, innovative materials and energy storage.”
It’s that last segment that’s emerging as another driver of new clean energy installations, especially at the utility power production level. While falling prices for solar and wind gear drove demand in the past, the cost of energy storage has also begun to fall at a rapid pace. “It’s the convergence of these two trends that’s really driving the action now,” says Pernick from Clean Edge.
Pernick’s firm has built various indexes that underpin clean-energy funds offered by First Trust. The First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) is a modified market cap-weighted product that invests in companies involved with clean-energy technologies such as solar photovoltaics, biofuels and advanced batteries. The fund, which has $96 million in assets and charges a 0.60 percent expense ratio, has generated an 8 percent annual return over the past decade.