Solar Energy ETFs

What are Solar Energy ETFs?

Solar energy exchange-traded funds (ETFs) invest in the stocks of companies that specialize in the solar power industry, particularly looking into companies that help generate, distribute, and manufacture solar energy-related products.

Since energy is among the most significant industrial sectors, companies have started to stray away from traditional energy sources such as fossil fuels, moving towards greener alternatives. 

The largest solar-energy-specific ETF is Invesco Solar ETF (TAN), which holds close to $3 billion in assets under management (AUM). 

As of 2022, there are only two ETFs that invest purely in solar energy companies: Global x Solar ETF (RAYS) and Invesco Solar ETF (TAN).

Investors also look to gain exposure to solar energy companies by investing in more general clean energy ETFs, such as iShares Global Clean Energy ETF (ICLN).  These include investments in companies that operate within the various clean energy sectors, including hydro, wind, and geothermal.

What are the Top Solar Energy ETFs

As of 2022, there are only two prominent ETFs that invest solely in solar energy companies:

Global X Solar ETF (RAYS)

Compared to passive ETFs, RAYS has additional screening processes to determine the right mix in its portfolio. It includes an algorithm that helps scan the public filings of prospective investments to ensure that at least 50% of their revenues are solar-based. 

The company also incorporates an ESG screening process to avoid investing in companies that violate human rights and sustainability laws.

The ETF holds close to 50 different companies, and each company is subject to a maximum weight of 8% of the portfolio to prevent a single company from dominating the ETF. 

Compared to Invesco Solar ETF (TAN), RAYS is relatively new, as it was created in September 2021. As a result, the volume of assets under management is meager, at just $8.4 million, and the ETF has an expense ratio of 0.5%.

Invesco Solar ETF (TAN)

A more established alternative to RAYS, TAN, has $3.1 billion in assets under management, with a higher expense ratio of 0.69%, which is also marginally higher than the sector average of 0.63%.

TAN offers investors purely solar-energy-sector investments, with 51 companies under holding. The ETF comprises companies involved in developing, installing, installing, financing, and manufacturing solar products.

TAN's holdings are categorized into two sub-segments: solar as the primary business (pure-play) and solar accounting for less than one-third of the revenues (medium-play).

U.S.-based companies make up 43% of this fund's total holdings, while China is the second largest, at 27%. TAN is also less large-cap-heavy, with roughly 46% of its holdings concentrated within mid-cap stocks.

Much of TAN's portfolio is concentrated on the top three or four holdings, which comprise 35% of the fund's total portfolio. These holdings include:

1. Solar Edge Technologies Inc. (SEDG: NASDAQ)
2. Enphase Energy Inc. (ENPH:NASDAQ)
3. First Solar Inc. (FSLR: NASDAQ)
4. Scatec Solar ASA (STECF:OTC)

Examples of Clean Energy ETFs

Clean energy companies have seen an immense gain in investor confidence, with the ICLN index, the largest clean energy fund, seeing a 90% increase in its price since the beginning of 2020.

The IRA (Individual Retirement Account), a tax-advantaged investment account designed to help save for retirement, is a strong catalyst for the sector because it removed the uncertainty around clean energy incentives boosting long-term investment and growth outlook for the industry.

Some of the most significant Clean Energy ETFs include:

iShares Global Clean Energy ETF (ICLN)

ICLN is the largest ETF in the clean energy sector, with close to $5.1 billion in assets under management. ICLN aims to be a globally diversified portfolio of clean energy companies, investing in companies within the geothermal, hydroelectric, solar, and wind energy industries.

ICLN has around 101 holdings, concentrated in the semiconductor equipment, renewable electricity, and electric utility sectors, with a lesser concentration in electrical equipment. 

ICLN's returns over the past three years are close to 27.3%, showing that solar energy equities perform better than alternative energy equities overall. The ETF has an expense ratio of 0.42%. 

Of the fund's 30 holdings, the top three mirror the top holdings of the Invesco Solar Energy ETF:

1. Solar Edge Technologies Inc. (SEDG: NASDAQ)
2. Enphase Energy Inc. (ENPH:NASDAQ)
3. First Solar Inc. (FSLR: NASDAQ)

SPDR S&P Kensho Clean Power ETF (CNRG)

CNRG tracks the performance of U.S. large-cap-only clean energy stocks. In addition, the ETF tracks the S&P Kensho Clean Power Index, which has more algorithmic selection criteria for its investments. 

The index uses artificial intelligence to capture companies whose products and services drive the innovation behind the clean energy sector. 

This method separates CNRG's 45 holdings into "core" and "non-core," depending on whether the companies make clean energy their primary business activity or secondary. 

Core companies make up a more significant proportion of the ETF's portfolio than non-core companies to offer more robust clean energy exposure. 

Future of Clean Energy ETFs

Clean energy ETFs have seen immense growth within the past few years as investors strive toward socially responsible investing instead of simply seeking profitable investments.

The highest gains for alternative energy companies come from the United States, as many companies and the government are adopting increasingly stringent clean energy standards to meet ESG targets.

For example, in early August, the U.S. passed a landmark climate bill that included more than $300 billion in climate investments — the highest amount ever allocated by the federal government to tackle climate change. In addition, it caused a spike in clean energy ETFs due to long-term investor confidence.

U.S. solar panel manufacturer, First Solar, was among the biggest beneficiaries of the bill, up 70% since July. It is also a top holding in all three best-performing clean energy ETFs.

Although 2022 saw a rally in oil prices because of the Russia-Ukraine war, green energy has received a lot of traction from investors, with much green energy ETFs seeing steady capital inflows.

Hydrogen ETFs are also rising, as solar, wind, and biomass energy sources do not provide sufficient cost-effective energy supplies. Hydrogen-related firms are estimated to see $2.5 trillion in investment by 2050 and could make up 25% of all energy produced globally.

Researched and authored by Aimaan Shergill | LinkedIn

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