ETFs to Stay Ahead of the Clean Energy Revolution

Exchange traded fund investors seeking to adapt a portfolio to prevailing global trends should explore the wide-reaching impacts of the clean energy revolution.

In the recent webcast, Keeping it Clean: Renewable Energy in Your Portfolio, Ron Pernick, Founder and Managing Director, Clean Edge, Inc., highlighted five major contributing factors to the global clean energy revolution, including low carbon policies, declining costs, an investment shift from fossil fuels to clean tech, public support, and smart grid electrification trends.

The growth in the sustainable energy sector has rapidly accelerated. In 2019, solar posted record additions of 115 gigawatts of capacity while offshore wind made up 10% of wind capacity additions, compared to 5% in 2015. Global solar panel capacity totaled 627 gigawatts in 2019, compared to 23 gigawatts in 2009. Additionally, global wind power capacity was at 651 gigawatts in 2019, compared to just 159 gigawatts in 2009.

Looking ahead, the Global Wind Energy Council projects over 20% of wind installations will be offshore by 2025.

The expansion of the renewable energy sector has also come with various advancements in peripheral technologies. For example, lithium-ion battery pack costs have declined 89% over the past decade. U.S. energy storage capacity saw deployment of over 1 gigawatts in 2020 and the market cross over a $1 billion annual threshold, despite the negative impact of the Covid-19 pandemic. U.S. energy storage is projected to hit a $7.3 billion annual market in 2025.

“Over the next 20 years, research firm Clean Edge believes that the energy storage market will double every 2 years,” Pernick said. “So there are many aspects of this green energy story that are converging, and reaching tipping points, that will lead to longer-term secular growth. Because unlike what we’ve seen in the past, the economics are now there.”

Pernick also underscored the shift in investment focus to the ongoing energy transition from fossil fuels. Global investments in clean energy expanded from $32 billion in 2004 to $282 billion in 2019, according to Bloomberg NEF. Renewable energy sources are set to represent almost three quarters of the $10.2 trillion the world will invest in new power generating technology through 2040 due to rapidly falling costs for solar and wind power, along with a growing role for batteries, including electric vehicle batteries, in balancing supply and demand.

Public perception in developing alternative energy has also shifted. Back in 2012, 47% of U.S. adults exhibited a priority for addressing America’s energy supply through the development of alternative energy sources like wind and solar. In 2019, 77% of U.S. adults now backed the development of alternative energy while 22% supported the expansion of traditional fossil fuel sources.

Looking at the grid of the future, Pernick argued that future energy production will come from many small power producers. The market will be decentralized, ignoring traditional boundaries. Transmission will include small-scale transmission and regional supply compensation. Meanwhile, consumers will take an active, participatory role in the system.

As a way to help investors tap into this shifting trend toward renewable energy development, Ryan Issakainen, Senior Vice President and Exchange-Traded Fund Strategist, First Trust, highlighted three ETF strategies that investors can consider, including the First Trust/Clean Edge Smart Grid ETF (NasdaqGM: GRID), First Trust Global Wind Energy ETF (FAN), and First Trust NASDAQ Clean Edge Green Energy Index Fund (NasdaqGM: QCLN).

GRID seeks to reflect the NASDAQ OMX Clean Edge Smart Grid Infrastructure Index, which includes companies engaged in all components of the smart grid.

FAN components are identified as providing goods and services exclusively to the wind energy industry.

Lastly, QCLN seeks investment results that correspond generally to an equity index called the NASDAQ Clean Edge Green Energy Index. The index is designed to track the performance of small-, mid-, and large-capitalization clean energy companies that are publicly traded in the United States.

Financial advisors who are interested in learning more about renewable energy investments can watch the webcast here on demand.