While sustainability motives drive some investors, the clean energy megatrend presents financial opportunities for all investors. It’s undeniable that significant capital is being invested in creating a greener future, as concerns about the effects of climate change on the worldwide economy grow. This capital influx will drive growth for publicly traded companies involved in clean energy innovations. Investors looking to benefit from this while keeping risk in check can look to the best renewable energy ETFs.
Based on the latest data from the International Energy Agency, renewable energy sources such as solar, wind, hydro and geothermal will account for 35% of global power generation by 2025. That leaves huge room for growth as companies innovate. The renewable energy market is expected to grow from around $972 billion in 2020 to more than $2 trillion in 2030, according to Next Move Strategy Consulting, for a compound annual growth rate (CAGR) of 9.6%.
Whether you’re investing in the sector to contribute to climate change solutions, seeking profit potential or both, here are the best renewable energy ETFs to buy.
| ICLN | iShares Global Clean Energy ETF | $19.56 |
| TAN | Invesco Solar ETF | $76.36 |
| LIT | Global X Lithium & Battery Tech ETF | $63.30 |
iShares Global Clean Energy ETF (ICLN)
With $4.8 billion in net assets, the iShares Global Clean Energy ETF (NASDAQ:ICLN) is the largest clean energy ETF. It is also one of the oldest, launched in 2008, and it has average daily trading volume of more than 3 million shares.
The fund tracks the S&P Global Clean Energy Index, offering exposure to nearly 100 companies around the world that produce energy from solar, wind and other renewable sources, as well as those that provide clean technology. Its top holdings include First Solar (NASDAQ:FSLR), Enphase Energy (NASDAQ:ENPH) and Plug Power (NASDAQ:PLUG).
Over the past 10 years, ICLN has averaged an annual return of 13.5%, outperforming the S&P 500, which has seen an average annual return of 11.8% over the past decade. Investors who believe that growth in the clean energy sector is just getting started should consider buying shares of the ETF to gain exposure to the industry while reducing company-specific risk.
The fund’s equity beta is 1.2, as of Feb. 28, indicating that it is more volatile than the market, although not drastically so. Meanwhile, it sports a price-to-earnings (P/E) ratio of 21.2 and a price-to-book (P/B) ratio of 2.2. Finally, it charges a management fee of 0.4%.
ICLN is among the best renewable energy ETFs to consider due to its size and diversification. It is definitely one of the more stable investment options in a volatile sector.
Invesco Solar ETF (TAN)
The Invesco Solar ETF (NYSEARCA:TAN) is for investors looking for solar energy exposure. It invests at least 90% of its $2.3 billion in net assets in the securities that make up the MAC Global Solar Energy Index. This ETF has average daily trading volume of almost 860,000 shares, making it a well-established choice.
As of March 31, the ETF held 53 stocks, with the top three positions accounting for over 28%. These positions are First Solar, Enphase Energy and SolarEdge Technologies (NASDAQ:SEDG).
Over the past 10 years, TAN has averaged an annual return of 16.7%. Its current return on equity (ROE) stands at 28.8%. It sports a forward P/E ratio of 14.3 and a P/B ratio of 2.6. Invesco charges a management fee of 0.5%, with a total expense ratio of 0.69% after factoring in administrative expenses and other costs.
The solar industry is expected to grow by leaps and bounds over the next decade, which means TAN is set to shine. While the fund has a relatively concentrated investment approach, it still offers diversification across the solar sector.
Global X Lithium & Battery Tech ETF (LIT)
The Global X Lithium & Battery Tech ETF (NYSEARCA:LIT), which tracks the Solactive Global Lithium Index, has amassed $3.4 billion in assets under management since it launched in 2010. It has average daily trading volume of roughly 458,000 shares.
The fund has 40 holdings and “invests in the full lithium cycle, from mining and refining the metal, through battery production,” according to Global X.
This portion of the clean energy space offers investors the opportunity to benefit from the rapidly growing electric vehicle (EV) market. Its top holdings include lithium giant Albemarle (NYSE:ALB), battery maker Panasonic (OTCMKTS:PCRFY) and EV leader Tesla (NASDAQ:TSLA).
Over the past 10 years, LIT has averaged an annual return of 10.2%. Its current return on equity stands at 23.8%. It sports a forward P/E ratio of 13.7 and a P/B ratio of 3.4. The fund has an expense ratio of 0.75%.
Demand for lithium is expected to surge in the coming years as the push to electrify transportation continues. Meanwhile, effective energy storage is essential for the broader transition to green energy as we look to address the intermittency issues ingrained in renewable energy sources. LIT is a great way to take advantage of these trends.
On the publication date, Faizan Farooque did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.