Hopes that 2020 would bring better things for the traditional energy sector are being dashed this month. Of course there’s still a long way to go this year, but the Energy Select Sector SPDR (NYSEARCA:XLE) is already behind the eight ball in terms of catching up with last year’s 11.7% gain. The benchmark energy exchange traded fund is lower by 5.7% in January.
It’s still too early to write off traditional energy ETFs, but investors considering the sector may want to reconfigure their views of what it means to be engaged with energy equities. Coal is dying a slow death, and even cleaner-burning (and cheaper) natural gas has found a less receptive audience among utilities and investors.
Alternative ways of looking at these scenarios include augmenting standard energy ETFs with their renewable counterparts. This is a practical strategy for multiple reasons. First, solar and wind stocks, among others, don’t reside in old guard energy ETFs like XLE. Second, alternative energy ETFs were among last year’s best-performing funds in the category, a theme that’s extending into 2020.
With those thoughts in mind, let’s have a look at some ETFs that, when combined, can help investors mix and match the old and the new in the energy space.
Energy ETFs to Buy: ALPS Clean Energy ETF (ACES)
Expense ratio: 0.65% per year, or $65 on a $10,000 investment.
Coming off a year in which it gained over 50%, ranking among the best non-leveraged ETFs in 2019, the ALPS Clean Energy ETF (CBOE:ACES) is off to another strong start in 2020 with a gain of 8.2%. What’s compelling about ACES relative to rival alternative energy ETFs is that it reaches multiple corners of this fast-growing market segment, including wind, solar, storage and efficiency, LED and smart grid technologies, just to name a few.
With wind and solar expected to be major forces in energy adoption this year, ACES looks like an energy fund in the right place at the right time. Data confirm as much.
“According to the U.S. Energy Information Administration’s (EIA) latest inventory of electric generators, EIA expects 42 gigawatts (GW) of new capacity additions to start commercial operation in 2020,” said EIA in a recent note. “Solar and wind represent almost 32 GW, or 76%, of these additions. Wind accounts for the largest share of these additions at 44%, followed by solar and natural gas at 32% and 22%, respectively. The remaining 2% comes from hydroelectric generators and battery storage.”
ACES is just a year and a half old, but it has rapidly become a force in the renewable energy ETF arena, amassing $137 million in assets under management.
iShares Global Clean Energy ETF (ICLN)
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Expense ratio: 0.46%
The iShares Global Clean Energy ETF (NASDAQ:ICLN) will turn 12 years old in June, making the nearly $513 million fund one of the more seasoned members of the renewable energy ETF landscape. ICLN, which tracks the S&P Global Clean Energy Index, isn’t quite as diverse, thematically speaking, as the aforementioned ACES, but the iShares fund does offer more than adequate penetration into the wind and solar industries, which could be a boon for the fund in 2020.
“Global solar installations will continue double-digit growth rates into the new decade,” according to the new 2020 Global Photovoltaic (PV) Demand Forecast by IHS Markit. “New annual installations in 2020 will reach 142 gigawatts (GW), a 14 % rise over the previous year.”
Investors should note that about 24% of ICLN’s geographic exposure is tied to emerging markets, with the bulk of that being Chinese companies. That could be a near-term drag on the fund amid the coronavirus scare, but it could also represent a buying opportunity.
VanEck Vectors Low Carbon Energy ETF (SMOG)
Expense ratio: 0.63%
For investors looking for an ETF proxy on high-flying Tesla (NASDAQ: TSLA), the VanEck Vectors Low Carbon Energy ETF (NYSEARCA:SMOG) is a fine idea. SMOG allocates 12.28% of its weight to Tesla stock, one of the largest weights to the electric vehicle maker among all ETFs. That’s nearly 400 basis points above SMOG’s second-largest component.
SMOG follows the Ardour Global Index, which “is intended to track the overall performance of low carbon energy companies which are those companies primarily engaged in alternative energy which includes power derived principally from bio-fuels (such as ethanol), wind, solar, hydro and geothermal sources and also includes the various technologies that support the production, use and storage of these sources,” according to VanEck.
Obviously Tesla is important to SMOG’s fortunes, and the stock’s recent ascent explains why the fund is higher by almost 23% over the past quarter.
As of this writing, Todd Shriber did not own any of the aforementioned securities.
