Never mind runaway inflation, supply chain disruptions and the unhappy stock market. The race to decarbonize the planet plows ahead! And the daily reports of climate change reaffirm that big changes are coming in the globe’s energy consumption.
Roughly $275 trillion from now through 2050 will be spent on physical assets that steer consumers away from legacy energy sources like fossil fuels to alternative energy sources like wind power, according to McKinsey & Company. This massive spending spree is expected to top 7.5% of global GDP.
Let’s examine three distinct approaches to exchange-traded fund investing in clean energy that advisors can use in portfolios to prepare clients for the coming changes.
A Diversified Energy Strategy
The ALPS Clean Energy ETF (ACES) is a pure play on companies that derive their value from clean energy.
The fund allocates its equity holdings across seven categories, including solar, wind, hydropower/geothermal, bioenergy, electric vehicles (EV), energy management and storage, and fuel cell/hydrogen technology.
Because of its diversified approach to hitting key clean energy segments, the ACES fund could be used as a core portfolio piece for investors focused on maintaining exposure to major developing investment themes.
Also, the fund takes a multi-cap approach instead of overweighting its portfolio to already mature large company energy stocks. As of March 31, the ACES fund had 30.87% invested in large-cap stocks, 58.57% in mid-caps and 10.56% in small caps.
The fund has benefited from this year’s shift to defensive industry sectors. At the end of May, it had almost 30% of its portfolio allocated to defensive utilities, which has helped it deliver better year-to-date performance than its peers.
A Transportation Focus
Although global electric vehicle registrations jumped by more than 40% in 2020, these vehicles still represented less than 5% of new cars sold, which suggests there’s a big opportunity for substantial upside growth, according to the International Energy Agency.
The Global X Autonomous and Electric Vehicles ETF (DRIV) is one way to capitalize on consumers’ transition to electric vehicles. The fund contains 73 global companies that are focused on the big changes ahead in transportation.
The DRIV fund owns companies involved with developing autonomous vehicle software and hardware. It also invests in electric vehicle makers and producers of EV components, such as lithium batteries. And it invests in raw materials like lithium and cobalt, items critical to these vehicles’ manufacturers.
Another benefit of the DRIV fund is its global diversification: 57.3% of the fund’s holdings are in U.S. companies, 9.5% are in Japanese names, 4.8% are in German stocks, and the remainder are in countries leading electric vehicle adoption and production.