U.S. solar policy has experienced many iterations over the years, but with the 2022 passage of the Inflation Reduction Act, some market observers believe a new era is dawning for solar guidelines in this country and with that, there are investment implications.
There are a variety of exchange traded funds with which investors can capitalize on this trend, including dedicated solar funds. However, industry-specific isn’t for all investors; neither is the volatility that comes along with owning individual solar equities. The VanEck Low Carbon Energy ETF (SMOG) offers investors a diversified play on renewable energy and low carbon policies with some exposure to solar equities.
The $206.7 million SMOG holds 72 stocks, which is a deep bench relative to competing ETFs in this category. Fortunately, the ETF’s solar exposure is more than adequate to position investors for a new era of domestic solar policy.
The Inflation Reduction Act is “holistic in that it seeks to incentivize the supply side, being domestic manufacturing, across the solar value chain, and it also seeks to stimulate the demand side. So it’s holistic and it’s seeking to produce and support a U.S. domestic manufacturing base and the purchase of that product for renewable energy installs,” noted John Miller, ESG and sustainability policy analyst for TD Cowen Washington Research Group.
SMOG, which follows the MVIS Global Low Carbon Energy Index, as noted above, is a diverse play on renewable energy investing. That’s pertinent because the Inflation Reduction Act has a lot of moving parts, many of which extend beyond solar but are relevant to SMOG investors. The long-term nature of the legislation is also a potential positive for SMOG investors.
“It’s effectively a 10-year plus policy. Historically, extensions for investment tax credits and production tax credits in the renewable space have been inside of three years, which is nice, but very difficult for an industry that thinks many instances in the utility side in multi-decade investment plans,” added Miller.
Interestingly, while the Inflation Reduction Act was signed by President Biden — a Democrat — and opposed by Republicans, Miller sees opportunity for the GOP to turn the tide in its favor when it comes to renewable energy. Looked at differently, if there’s a “red wave” in the 2024 election season, SMOG investors may not be endangered. They could potentially benefit.
“One way you can make climate policy bipartisan is if you make it, again, a jobs bill, an industrial policy bill, and a conversation, vis-a-vis China, that adds jobs in tax credits to local districts. So I think a lot of those elements are all coming together at once and the market and investors are still trying to unpack that and what that means. We’re very constructive on this for the long term,” concluded the TD Cowen analyst.
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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.
