The latest report from the U.S. Energy Information Administration (“EIA”) shows that renewable energy will be the fastest growing power source through 2040. (Read: Solar ETFs to Watch Following Q3 Results)
"Clean energy" has long been the focus of the current administration. President Obama’s "Climate Change Action Plan" and the favorable green energy trends have already done a lot in pushing the sector northward.
On Aug 3, 2015, the White House revealed the final version of the ambitious climate policy. This Environmental Protection Agency (EPA) program seeks to cut CO2 emissions from the nation's power plants. The Obama administration has vowed for CO2 reduction of 28% by 2025 and 32% by 2030, from 2005 levels. This version turns out to be a little stronger than the draft proposal released last summer, wherein the EPA had proposed total CO2 reduction of 29% by 2025 and 30% by 2030.
Per the International Energy Agency, the share of renewables in total power generation is expected to rise to 33% in 2040 from 21% in 2012 globally. Again, the EIA report reveals that electricity generation from renewable sources is projected to increase to 18% by 2040 in the U.S. (also read: Green Energy: Investment Opportunity).
Wind and solar production have been rising at an exponential rate and renewable energy sources can now generate electricity at a price very close to the electricity generated by fossil fuels. Per the latest report released by the Solar Energy Industries Association (“SEIA”), the U.S. solar energy industry grew 8.7% year over year to reach 1,393 megawatt (“MW”) DC in the second quarter 2015. This is a landmark for the market, with cumulative installations reaching the 20 GW DC mark, buoyed by strong contributions from each of three segments: utility, commercial and residential. The SEIA expects the U.S. PV market in 2015 to witness yet another strong year with installations reaching 7.7 GW DC, representing a 24% increase over 2014.
Again, the American Wind Energy Association (“AWEA”) reported that the U.S. wind industry installed 1,661 MW during the second quarter of 2015, bringing the first half 2015 installations to 1,994 MW. This is more than double the capacity installed in the first half of 2014. (Read: Global Energy ETFs in Focus following BP’s Q3 Results)
Just as pro-environment regulations have given a boost to the alternative energy sector, trade conflicts between some of the major solar product manufacturing countries have complicated the landscape. Solar trade relations have particularly heated up with China and the U.S. trying their level best to protect homegrown interests.
The Commerce Department in Dec 2014 set anti-dumping duties at about 52% on most module imports from China and at 19.5% on most imports of Taiwanese cells. It has also slapped 39% anti-subsidy tariffs on most China-made panels.
The new duties would further escalate trade tensions between the two countries at a time when the two nations were planning to work together in the common fight against global warming and carbon emissions. The U.S. believes that Chinese manufacturers have hitherto benefited from unfair subsidies offered by their government.
Globally, China, the world’s prime manufacturer of solar panels, is emerging as the market leader for solar PV to meet the growing need for clean energy. The Chinese economy has been struggling and its stock market has sold off dramatically in recent months. As the world’s biggest producer of solar panels is now contending with lower growth forecasts (below 7% for 2015), decreasing exports along with industry overcapacity as well as the ongoing decline in the stock market, its solar industry may also be at risk (read: Are China Worries, Oil Prices a Threat to Renewables?).
Beyond the China factor, the sector as a whole – and solar stocks in particular – have taken a beating ever since oil prices began to tumble last June. This weakness has persisted this year as well. The decline in oil prices has made renewable energy stocks unattractive, sparing neither U.S. nor Chinese solar companies.
While the solar energy sector’s long-term potential is undeniable, the industry is faced with a number of near-term challenges that will likely keep these stocks under pressure. That said, the demand for solar energy is strengthening at a rapid clip and analysts see no fundamental correlation between the oil plunge and solar share losses (also read: Alt-Energy Stock Outlook - Sept. 2015).
ETFs to Tap the Sector
For investors seeking to play this trend in ETF form, the following series of alternative energy ETFs could make interesting picks.
WilderHill Clean Energy Portfolio (PBW)
Launched in March 2005, PBW tracks the WilderHill Clean Energy Index and manages an asset base of $102.9 million which it invests in a portfolio of 45 stocks.
It is well diversified across various sectors. Information Technology takes the top spot with a 51% allocation followed by Industrials (18%) and Utilities (15%).
The fund’s top 10 holdings jointly contribute 31.7%. The product invests almost 90% in companies that are involved in the generation of cleaner energy and conservation. It charges a hefty 72 basis points in fees.
Market Vectors Global Alternative Energy ETF (GEX)
Launched in May 2007, GEX tracks the Ardour Global Index, focusing on companies that are primarily engaged in the business of alternative energy comprising solar power, bio energy, wind power, hydro power and geothermal energy.
The fund holds about 31 stocks in its pocket, has assets under management of $84 million and charges an expense ratio of 64 basis points annually.
Apart from robust holdings in the U.S., the product offers solid exposure to China and some European countries. From a sector perspective, Industrials and Information Technology take the largest share with a respective 45% and 27.7%. Further, the fund’s top 10 holdings jointly contribute 62.69% to the fund. Vestas Wind Systems A/S, Tesla Motors Inc. (TSLA) and Eaton Corp Plc (ETN) are the top three holdings, with 28.88% of asset allocation in total.
Global Clean Energy Portfolio (PBD)
This ETF follows the WilderHill New Energy Global Innovation Index, giving investors exposure to about 105 companies that are engaged in renewable sources of energy and technologies facilitating cleaner energy.
Assets under management are just over $62.7 million and the expense ratio is 76 basis points a year. The fund’s top 10 holdings contribute 17.95% to it.
PBD is heavy in Industrials, as this represents 31.36% of the fund. This is followed by Information Technology (30%) and Utilities (27.15%). In terms of countries, the U.S. dominates with 30.17% followed by China with 17.16%.
First Trust Nasdaq Clean Energy Green Energy Index (QCLN)
This ETF tracks the NASDAQ Clean Edge Green Energy Index and follows a benchmark of clean energy companies, giving exposure to 48 such companies in total with an asset base of $83.3 million. The fund charges investors 60 basis points a year in fees for the exposure. The top 10 holdings comprise 55.18% of the total fund.
Technology firms dominate this ETF, accounting for 31.96% of the assets, followed by Oil and Gas stocks with about 22.66%. In terms of geographical diversification, the fund is almost entirely focused on the U.S. market.
iShares Global Clean Energy ETF (ICLN)
This ETF tracks the S&P Global Clean Energy Index with 29 holdings and an asset base of $71.8 million. ICLN charges investors 47 basis points a year in fees for the exposure.
In terms of geographical breakdown, China leads the list with 26.33%, while the U.S. holds the second spot with 24.12%. ICLN is more inclined toward Renewable Electricity, representing 26.29% of the fund, though Heavy Electrical Equipment receives a big chunk as well (20.31%).
The fund appears to be highly concentrated in the top 10 holdings with a share of 58.11%.
Bottom Line
The depletion of fossil fuel reserves, new and advanced technologies, accompanied with more competent alternative energy applications have made green power more feasible, injecting optimism into the sector. Yet, investors should closely track the political factors that could impact the sector. These include eco-friendly mandates and renewable energy agendas to see if potential benefits will spill over to the renewable companies and the sector ETFs.
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PWRSH-W CL EGY (PBW): ETF Research Reports
MKT VEC-GLBL AE (GEX): ETF Research Reports
PWRSH-GLB CL-EY (PBD): ETF Research Reports
NASDAQ-CL EDG G (QCLN): ETF Research Reports
ISHARS-GL CL EN (ICLN): ETF Research Reports
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