Alternative energy companies, which sell or use everything from solar energy to hydrogen and electric batteries, aim to make a profit by transforming the way societies power themselves. This is happening amid rising global concern about climate change, and also amid long-term forecasts of dwindling fossil fuel supplies.
Inflation Reduction Act
On Aug. 16, 2022, President Biden signed the Inflation Reduction Act (IRA), a piece of legislation that is likely to have a significant impact on the alternative energy industry. The IRA is expected to invest roughly $369 billion in energy security and climate change in the coming years.
Alternative energy exchange-traded funds (ETFs) track individual companies like oxide fuel cell maker Bloom Energy Corp. (BE) and hydrogen power firm Plug Power, Inc. (PLUG), as well as indexes that track several alternative energy companies. Many of the businesses in this industry are largely untested and inherently risky additions to a portfolio on their own, but an ETF can offer potentially lower-risk access to the sector.
- The alternative energy industry has outperformed the broader market in the past year.
- The top ETFs based on 1-year trailing total returns are NLR, ICLN, and CNRG.
- The top holding of the first of these funds is Dominion Energy Inc. and the top holding for each of the other two is Enphase Energy Inc.
There are 12 ETFs focused on alternative energy that trade in the U.S., excluding leveraged and inverse funds as well as those with under $50 million in assets under management (AUM). Over the past year, the alternative energy industry, as represented by the benchmark MSCI Global Alternative Energy Index, has outperformed the broader market. The index has 1-year trailing total returns of -2.8% as compared to -5.2% for the S&P 500 as of Aug. 6, 2022. The best alternative energy ETF for Q4 2022 is the VanEck Uranium+Nuclear Energy ETF (NLR).
Below, we examine the top 3 alternative energy ETFs as measured by 1-year trailing total returns. All figures below are also as of Aug. 5, 2022.
- 1-Year Trailing Total Returns: 8.3%
- Expense Ratio: 0.60%
- Annual Dividend Yield: 1.94%
- 3-Month Average Daily Volume: 4,714
- Assets Under Management: $50.4 million
- Inception Date: Aug. 13, 2007
- Issuing Company: VanEck
NLR is a multi-cap fund that focuses on value stocks. The fund tracks the MVIS Global Uranium & Nuclear Energy Index. The index is comprised of companies involved in uranium mining and related projects when those projects are expected to generate at least half of the company’s revenue, as well as companies constructing and maintaining nuclear power facilities, reactors, and equipment, or those producing electricity from nuclear sources. More than half of the companies in the fund are based in the U.S., with companies from Japan, Canada, and France receiving the next-largest allocations.
The top holdings of NLR include Dominion Energy Inc. (D), a natural gas, electricity, and coal power company serving customers across the U.S.; Duke Energy Corp. (DUK), a holding company that provides electric power and natural gas services; and Constellation Energy Corp. (CEG), an electric power provider through nuclear, solar, wind, hydro, and other sources.
- 1-Year Trailing Total Returns: -1.1%
- Expense Ratio: 0.42%
- Annual Dividend Yield: 0.67%
- 3-Month Average Daily Volume: 5,162,234
- Assets Under Management: $5.6 billion
- Inception Date: June 24, 2008
- Issuing Company: BlackRock Financial Management
ICLN is a multi-cap fund that targets a blend of value and growth stocks. It tracks the S&P Global Clean Energy Index, which focuses on global companies that produce energy from solar, wind, and other renewable sources. ICLN offers broad-based exposure to a variety of sub-industries within alternative energy. Semiconductor equipment stocks make up just under 24% of the fund’s portfolio, followed by renewable electricity and electric utilities stocks.
The top holdings of ICLN include Enphase Energy Inc. (ENPH), a maker of solar micro-inverters, batteries, and related equipment; SolarEdge Technologies Inc. (SEDG), an Israel-based manufacturer of solar inverters and similar products; and Vestas Wind Systems A/S (VWS:CSE), a Danish maker, installer, and servicer of wind turbines.
- 1-Year Trailing Total Returns: -1.5%
- Expense Ratio: 0.45%
- Annual Dividend Yield: 0.74%
- 3-Month Average Daily Volume: 24,828
- Assets Under Management: $327.9 million
- Inception Date: Oct. 22, 2018
- Issuing Company: State Street
CNRG is a multi-cap, blended fund focusing on alternative energy stocks in developed markets. It tracks the S&P Kensho Clean Power Index, an index of companies driving innovation in the areas of solar, wind, geothermal, and hydroelectric power. Electrical components and equipment stocks make up the largest portion of the portfolio at over 19%. Electric utilities, semiconductors, and renewable electricity stocks comprise the next-largest allocations.
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