Clean energy stocks have had a volatile few years, to say the least. Many renewable energy stocks, particularly in the solar energy industry, skyrocketed in 2020 as oil and gas prices crashed and investor sentiment was positive. That enthusiasm carried over into 2021 before inflation and rising interest rates threw a wrench into the rally.
However, favorable U.S. government policy, most notably the tax credits and funding available from the Inflation Reduction Act (IRA), is a catalyst that could spark a renewed interest in clean energy. At least in the short term, many companies that benefit from the IRA have seen their stock prices tumble toward 52-week or even multi-year lows.
With many solar, wind, hydrogen, electric vehicle (EV), utilities, and power generation stocks down big, now looks like a good time to buy the dip in clean energy stocks. For investors who prefer diversification, exchange-traded funds (ETFs) with access to various industries and geographies may be the best all-around option.
Topping the list of best clean energy ETFs to buy now are the iShares Global Clean Energy ETF(NASDAQ: ICLN), the First Trust Nasdaq Clean Edge Green Energy Index Fund(NASDAQ: QCLN), and the Global X Lithium & Battery Tech ETF(NYSEMKT: LIT). Here's what makes each ETF a great buy now.
A foundational clean energy ETF
With $4.6 billion in net assets, the iShares Global Clean Energy ETF is one of the larger clean energy ETFs. The fund reached its 10-year high in early 2021 and is since down a painful 43.6% from that high.
The fund provides a foundational starting point for investing in clean energy, thanks to its diversification across sectors and geographies. 30.61% of the fund is in semiconductors and semiconductor equipment, followed by 28.4% in utilities, 18.7% in renewable electricity, 18% in electric components, equipment, and heavy electric equipment, and a little over 4% in other. 47.2% of the fund is invested in North America, 24.1% in Europe, 18.5% in Asia, 4.9% in Brazil, and a little under 5% in other.
Top equity holdings include a nice blend of information technology companies, utilities, and industrials. The fund is heavily weighted into companies that are financing or operating projects, as well as solar energy information technology companies like Enphase Energy(NASDAQ: ENPH) and SolarEdge Technologies(NASDAQ: SEDG) -- which make up a combined 14.3% of the fund. But overall, it's a great balance. The 0.4% expense ratio isn't dirt cheap, but it is reasonable for a reputable BlackRock-managed fund.
An investment in decarbonization
The First Trust Nasdaq Clean Edge Green Energy Index Fund is big in its own right, with $1.7 billion in net assets. It too has well-known top holdings. But what makes this fund unique is its concentration in EV stocks, and its emphasis on North America.
The largest holding is ON Semiconductor(NASDAQ: ON), with an 8.8% weighting. ON generates a large portion of its sales from semiconductors for the auto industry. Enphase Energy makes up 8.3% of the fund, and Tesla (NASDAQ: TSLA) makes up 8%. Lucid Group and Rivian make up a combined 6.7% of the fund. The fund also has exposure to infrastructure investment companies and utilities like Brookfield Renewable Partners, NextEra Energy Partners, Atlantica Sustainable Infrastructure, Clearway Energy, and Hannon Armstrong Sustainable Infrastructure -- which make up a combined 8.1% of the fund.
The fund also has sizable holdings in lithium producers and solar energy stocks. Overall, it's arguably a bit riskier and less diversified than the iShares Global Clean Energy ETF, but may be better suited for investors targeting a higher concentration of U.S.-based companies.
The fund for EV expansion
The Global X Lithium & Battery Tech ETF is probably one of the most unique clean energy ETFs out there, because the vast majority of its holdings are based outside of North America. This fund is focused on the suppliers that are making the EV industry take market share. That starts with lithium mining and reliable battery production.
Despite its niche investment thesis, the fund has a large number of net assets at $3.3 billion. A core reason for the sizable amount of assets in the fund is its roaring performance from 2020 and 2021, which saw the fund roughly triple in price in two years as lithium prices soared and automakers poured billions into locking down reliable battery suppliers. The fund has cooled off since then, which is great news for investors interested in battery technology.
The fund's international exposure showcases a unique advantage of ETFs. While it's easy to buy shares in your favorite domestic solar energy stock or utility, it is far harder to buy positions in companies traded on foreign exchanges. This ETF takes away that headache by providing a bundled approach to investing in EV suppliers, many of which are in Asia and would be challenging to invest in through some brokerages.
A balanced way to invest in the energy transition
The energy transition continues to be one of the most exciting multi-decade opportunities. But with so many players across different industries and geographies, it can be challenging to decide on a single stock or two to invest in. All three of these ETFs have suffered steep sell-offs. With negligible differences in expense ratios and all three ETFs being managed by large, reputable firms, it's best to choose the ETF that suits which industries and companies you believe can compound gains from the clean energy investment over time.
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Daniel Foelber has positions in Rivian Automotive and has the following options: long January 2024 $17.50 calls on Rivian Automotive, long May 2023 $230 calls on Enphase Energy, long September 2023 $146.67 calls on Tesla, short April 2023 $14 calls on Rivian Automotive, short January 2024 $20 calls on Rivian Automotive, short January 2024 $22.50 calls on Rivian Automotive, short May 2023 $240 calls on Enphase Energy, and short September 2023 $150 calls on Tesla. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Brookfield Renewable Partners, Enphase Energy, ON Semiconductor, and SolarEdge Technologies. The Motley Fool has a disclosure policy.