Yes, the performances being turned by renewable energy exchange traded funds this year are disappointing, but investors might do well to take a long-term view of assets such as the ALPS Clean Energy ETF (ACES).
In its recently published international energy outlook, the International Energy Agency (IEA) outlines growth scenarios for renewables as well as fossil fuels. Of course, renewables growth is pivotal to the ACES thesis because the fund reaches across multiple clean energy segments.
“Renewables will be the primary source for new electricity generation, but natural gas, coal, and increasingly batteries will be used to help meet load and support grid reliability,” says IEA. “If current policy and technology trends continue, global energy consumption and energy-related carbon dioxide emissions will increase through 2050 as a result of population and economic growth.”
On that timeline, IEA forecasts that when it comes to electricity generation, coal consumption will steady and not increase dramatically. Same goes for nuclear power. However, the agency projects dramatic increases for solar and wind as percentages of power generated. That leadership from solar and wind is crucial to the ACES thesis because those are the ETF’s largest industry allocations, combining for over 45% of the fund’s roster.
“Electricity’s share of the world’s final consumption of energy has risen steadily over recent decades, and now stands at 20%. Its rise accelerates in future years as the pace of transitions picks up,” says IEA. “In the NZE, electricity accounts for around 50% of final energy use by 2050 (around 30% in the APS). Given that electricity delivers useful energy services with better efficiency than other fuels, the contribution of electricity is even higher than these numbers would suggest.”
Enhancing the case for ACES as a long-term idea is that, as highlighted by the IEA study, non-OECD countries are expected to have larger rates of economic growth over the next several decades. Many of those nations are only now beginning to embrace renewables, and that adoption could accelerate as they look to balance economic growth and battling climate change.
Another point of emphasis for ACES investors is IEA estimating that electric vehicles (EV) could account for almost a third of all automotive stock by 2050. With EV and energy storage names representing 12% of the ACES roster, that forecast, if accurate, could be significant for the ETF.
Other renewable energy ETFs include the First Trust Global Wind Energy ETF (FAN) and the SPDR Kensho Clean Power ETF (CNRG).
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
