Best Clean Energy ETFs (Why It’s Time to Revisit Your Old Energy Portfolio)

Published by Fernando on

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Investors looking for the best clean energy ETFs, must be aware of the megatrends in the global energy sector. The best ETF should expose investors to companies in the wind, solar and clean tech sectors.

What are energy ETFs?

The energy sector is a broad term used to define companies that either produce or supply energy to the economy, including means of production, transportation, and heating. As we have seen in a previous post about Portfolio Carbon Footprint, electricity, heat, and transportation account for almost 50% of the total global greenhouse gas emissions. This makes the energy sector the main driver of climate change, and the most critical part of the solution to the climate emergency.

When doing a quick research about “energy ETFs”, investors will find a multitude of funds, from large to small ETF issuers, from broad to narrow focuses. Most of the time we might see ETFs with opposite investment strategies recommended under the same “energy ETF” umbrella, such as oil& gas energy ETFs and renewable energy ETFs.

We would like to make a distinction between the old energy and the new energy. For decades, old energy sources, such as Oil & Gas, have dominated the energy market and, consequently, Wall Street minds and pockets. However, an energy transition is on its way, bringing new and renewable energy sources, and investors need to be aware of that.

When searching for “energy ETFs” the investor might find the following old energy ETFs:

Energy ETFsIssuerTickerAUM ($ billion)TER (%)
Energy Select Sector SPDR® ETFState StreetXLE8.410.13%
Vanguard Energy ETFVanguardVDE2.400.10%
First Trust North Amer Engy InfrasETFFirst TrustEMLP1.680.96%
iShares Global Energy ETFiShares / BlackRockIXC1.020.46%

Despite those heavy-weight ETFs having investment objectives that usually states “seeks to track the investment results of an index composed of global equities in the energy sector”, investors must be aware that the main objective of the four ETFs listed above is mainly to “provide exposure to companies in the oil, gas and consumable fuel, energy equipment and services industries”.

In fact, Energy Select Sector SPDR ETF (XLE) from State Street, Vanguard Energy ETF (VDE), and iShares Global Energy ETF (IXC) are extremely similar ETFs. The first two focus on the US and Canada stocks, while IXC has a global geographic allocation. However, their objective is still the same: invest in Oil & Gas companies, which results in having 98% to 100% of the funds’ assets allocated to fossil fuel companies.

Worse than that, XLE and VDE are badly diversified, with at least 43% of each ETFs allocated to only 2 companies: Exxon Mobil and Chevron. First Trust North American Energy Infrastructure ETF (EMLP) is slightly more diversified, focusing on downstream infrastructure companies, however still with 90% of assets allocated to fossil fuels.

Clean and green energy ETF - solar and wind renewable energy

The risks of old energy ETFs

The traditional Oil & Gas industry is on the decline. Oil prices are plummeting and several media sources are debating about the imminence of peak oil. The future does not look good for Oil & Gas businesses. After several years of climate change denial and lobbying against renewable energy, some oil companies are slowly realizing that their business models need to be adjusted.

European Oil & Gas majors, including Shell, BP, Eni, Repsol, TOTAL, and Equinor have already announced ambitions to reduce future emissions and started investing a small (tiny) share of their portfolio into clean and renewable energy. Moreover, as a consequence of reduced oil prices and uncertainty of future demand, Oil & Gas companies risk being left with billions of dollars in stranded assets.

The year 2020 is a critical year for investors to rethink their long-term strategy and reconsider which type of energy ETFs they would like to have on their long-term sustainable investment portfolio.

Looking for low carbon ETFs? Take a look at our list with the most sustainable low carbon ETFs

Why focus on new and renewable energy ETFs?

On the opposite side of the energy spectrum, the perspectives for the new energy sector are much brighter. New energy can be defined as future-proof and renewable energy technologies, that can supply energy for all and at the same time reduce social and environmental impact.

According to the World Economic Forum, three trends will drive the energy transition:

  • Decarbonization: Continuous decline of investments in fossil fuels due to uncompetitive prices and environmental pressures. Transition into a carbon-free economy, where electrification and renewable energy will keep expanding.
  • Decentralization: Shif away from the traditional utility business model and transition into a more democratic, distributed energy network.
  • Digitalization: An increased degree of automation and analytics will be required, demanding the digital transformation of power management solutions.

Below StartUs Insights indicates how each technology is expected to be part of this energy transition:

Top 10 Energy Industry Trends and Innovations for 2020 and Beyond - StartUs Insights

Corroborating the trends above, in October 2020, the International Energy Agency (IEA) released the World Energy Outlook 2020. In the report, the IEA expects strong growth in renewables during the next decade, driven by a massive expansion of solar PV, supplemented by the expansion of onshore and offshore wind developments.

Renewables meet 80% of global electricity demand growth during the next decade and overtake coal by 2025 as the primary means of producing electricity. By 2030, hydro, wind, solar PV, bioenergy, geothermal, concentrating solar and marine power between them provide nearly 40% of electricity supply.”

IEA, World Energy Outlook 2020

The best clean energy ETFs

The macro trends above should be enough to give investors the right mindset when looking for new and revenwable energy ETFs. We have collected the energy ETFs that focus on clean and renewable energy sources, and related supply chain. The main clean energy ETFs are:

New energy ETFsTickerAUM ($ billion)TER (%)# of holdings
iShares Global Clean Energy ETFICLN2.100.46%30
First Trust NASDAQ® Cln Edge® GrnEngyETFQQCLN0.750.60%44
First Trust Global Wind Energy ETFFAN0.250.60%47
Invesco WilderHill Clean Energy ETFPBW0.970.70%48
Invesco Global Clean Energy ETFPBD0.130.75%97
Invesco Cleantech ETFPZD0.320.68%60
Invesco Solar ETFTAN2.100.71%32
Lyxor New Energy UCITS ETF Dist.NRJ0.580.60%39

iShares Global Clean Energy (ICLN)

BlackRock offers the well-balanced iShares Global Clean Energy (ICLN), which is globally exposed to companies that produce energy from solar, wind, and other renewable sources. It’s a well-stablished ETF with a TER of 0.46%,

For eropean investors, iShares Global Clean Energy can be found as iShares Global Clean Energy UCITS ETF with tickers INRG or IQQH. This ETF has a higher TER, 0.65%.

First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN)

Issued by First Trust, QCLN has a more restricted geographic allocation but covers more industries. It is designed to track the performance of clean energy companies traded in the US, including companies in the manufacturing, development, distribution, and installation of emerging clean-energy technologies (e.g. solar photovoltaics, biofuels, and advanced batteries).

First Trust Global Wind Energy ETF (FAN)

Another option from First Trust is the First Trust Global Wind Energy ETF (FAN). It is designed to cover the global wind energy by tracking the ISE Clean Edge Global Wind Energy Index. Canada, Denmark, and Spain are the countries where this ETF has higher exposure.

Invesco comes strong into the clean energy area with 4 ETFs: PBW, PBD, PZD, and TAN:

Invesco WilderHill Clean Energy (PBW)

The popular clean energy ETF from Invesco, Invesco WilderHill Clean Energy (PBW) focuses on US-publicly traded stocks that are engaged in the business of the advancement of cleaner energy and conservation. 85% of country allocation is on US-based companies, followed by 10% of Chinese-based companies.

Invesco Global Clean Energy ETF (PBD)

PBD is the global equivalent of PBW and the smallest on the list. The Invesco Global Clean Energy ETF (PBD) is also formed of “companies engaged in the business of the advancement of cleaner energy and conservation”. Allocation to US-based companies is around 30%, followed by 6% in Germans, 6% in Canadians, and 5% in Chinese-based companies.

Invesco Cleantech ETF (PZD)

This ETF is the odd one in the group since it focuses on cleantech, instead of clean energy. This results in Investo Cleanthech ETF (PZD) having a portfolio with strong clean energy stocks such as SolarEdge, Enphase Energy, and Vestas. But also brings high allocation (34%) to the Information Technology sector (e.g. Autodesk and ANSYS).

Invesco Solar ETF (TAN)

Finally, we have TAN, the most popular clean energy ETF from Invesco, and the best performer among energy ETFs in 2020 (YTDoct2020: +114%). As the ETF name suggests, TAN focuses on companies in the solar energy industry, with a special focus on the US, Hong Kong, and China.

Lyxor New Energy UCITS ETF Dist. (NRJ)

Domiciled in France and issued by Lyxor, NRJ is a well-diversified alternative for European investors. The ETF tracks an index that “aims for the world’s 40 largest companies operating in the renewable energy, distributed energy or energy efficiency sectors, who derive at least 40% of their revenue from alternative energy-related activities”.

The ETF titans, State Street, and Vanguard do not offer clean energy ETF as alternatives to their traditional old energy ETFs: XLE and VDE.

Top 10 holdings of the clean energy ETFs

For a quick understanding of the invesmtent objective of each clean energy EFT, let us take a look at the top 10 holdings of each ETFs listed above:

 ICLNQCLNFANPBWPBDTANPZDNRJ
#1USD cashNIO Inc.Northland PowerJinkoSolar Holding CoJinkoSolar Holding CoSolarEdge TechnologiesSolarEdge TechnologiesSchneider Electric
#2First SolarSolarEdge TechnologiesVestas Wind SystemsLithium AmericasDaqo New Energy CorpEnphase EnergyEnphase EnergyNextEra Energy
#3Meridian EnergyEnphase EnergyOrstedNIO IncEnphase EnergyXinyi Solar HoldingsAutodeskIberdrola
#4Contacct EnergyTeslaSiemens Gamesa Renewable EnergySunPower CorpSunPowerFirst SolarVestas Wind SystemsVestas Wind Systems
#5VerbundAlbemarle CorporationBoralexDaqo New Energy CorpSolarEdge TechnologiesJinkoSolar Holding Co LtdSiemens Gamesa Renewable EnergyOrsted
#6Vestas Wind SystemsON Semiconductor CorporationChina Longyuan Power Group Corporation LimitedEnphase EnergyNIO IncSunrunANSYSStmicroelectronics
#7OrstedBrookfield Renewable PartnersInnergex Renewable EnergySolarEdge TechnologiesBYD CoScatec SolarEurofins ScientificTDK Corp
#8Enphase EnergyCreeTPI CompositesPlug PowerLithium AmericasDaqo New Energy CorpXylemSolaredge Technologies
#9Siemens Gamesa Renewable EnergySunrunGeneral Electric CompanyLiventAmerescoEncavisTrimbleKingspan Group
#10Solaredge TechnologiesFirst SolarDuke Energy CorporationKandi Technologies GroupScatec SolarCanadian SolarKingspan GroupNibe Industrier

At the table above we can see that some ETFs have overlapping stocks. The most frequent holding is SolarEdge Technologies present in 7 out of the 8 ETFs. Enphase Energy is also constant appearance, present 6 times. Then we have Vestas Wind Systems which is in 4 ETFs: ICLN, FAN, PZD and NRJ.

Looking beyond the top 10 holdings, the highest overlap is seen between QCLN and PBW, which have 29 holdings in common. ICLN and PBD are also highly correlated, with 24 holdings in common.

The ETF Research Center has nice tool to verify how ETFs overlap. However, their ETF holdings were not up-to-date.

The carbon intensity of clean energy ETFs

When looking for a clean energy ETF is also important to check the ESG ratings and the carbon footprint of each ETF. We know that those ETFs are expected to hold clean businesses, however, in some cases, their criteria might be a bit broad. It is also common to find companies listed on clean energy ETF that are transitioning to renewables and clean technology.

For transparency, we have included in the table below the well-known MSCI ESG criteria and carbon internsity and the footprint metrics from the US-based Fossil Free Funds database.

Clean energy ETFsTickerMSCI ESG RatingMSCI WACI (tCO2/M$ sales)FFF RatingFossilFreeFunds
(tCO2/M$ sales)
iShares Global Clean Energy ETFICLNA243C183
First Trust NASDAQ® Cln Edge® GrnEngyETFQQCLNA142A181
First Trust Global Wind Energy ETFFANAAA722F636
Invesco WilderHill Clean Energy ETFPBWBBB205A123
Invesco Cleantech ETFPZDAA54A57
Invesco Global Clean Energy ETFPBDA336B131
Invesco Solar ETFTANBBB274A196
Lyxor New Energy UCITS ETF DistNRJAA55NANA

Note: MSCI and FFF diverge on the carbon intensity. Both account for Scope 1 and 2 emissions, however, MSCI calculates the weighted-average carbon intensity per USD 1 million of sales. While Fossil Free Fund uses yourSRI.com data to disclose carbon intensity in tonnes of CO2e emissions per USD 1 million revenue. The divergence may be related to assessments made at a different time or bafore/after an ETF portfolio update)

As we can see at the table, MSCI is more generous when applying its ESG Rating since includes all environmental, social, and governance aspects of the ETF. Fossil Free Fund rating disclosed above is only related to the carbon footprint of the ETFs, and consequently, more critical.

For example, while FAN has a remarkably high MSCI ESG rating of ‘AAA’, Fossil Free Funds rates the ETF carbon footprint with an ‘F’. We can see that it is a consequence of FAN carbon intensity numbers (722 tCO2/$M at MSCI and 636 tCO2e/$M at FossilFreeFunds). What drives FAN higher emissions are mainly two companies: China Longyuan Power and Duke Energy Corp.

China Longyuan Power is a large wind energy producer and developer with some thermal power plants on its portfolio. Moreover, China’s energy system is still heavily based on coal and non-renewable sources, therefore wind and solar equipment produced in China are likely to have higher emissions than equipment produced in Europe or the US.

Despite announcing its net-zero ambitions by 2050, Duke Energy Corp. portfolio is heavily based on non-renewable sources. It is mainly generating electricity from coal (27%) and natural gas/fuel oil (36%)

After FAN, the ETFs with high MSCI carbon intensity are PBD, TAN, and ICLN. (PBD has an oddly high carbon intensity from MSCI when compared to the FossilFreeFund number, which might indicate assessments made for different ETF portofolios).

The main driver of those carbon intensities is again Chinese equipment manufacturers. A common factor among ETFs ICLN, PBD, and TAN, is that they hold positions either in Xinyi Solar Holdings or in Jinko Solar Holding (TAN has both companies). The two companies are large Chinese manufacturers and sellers of solar panel components.

Despite the relatively higher carbon intensities for 4 out of the 8 clean energy ETFs above, only FAN and PBD (if MSCI is correct) are at critical level. As a reference, Vanguard Energy ETF (VDE) has a MSCI weighted average carbon intensity of 464 tCO2/$M sales.

The carbon footprint outliers are PZD and NJR, with remarkably low carbon intensities (<60 tCO2/$M sales), mainly driven by PZD’s high allocation in the Information Technology sector, and NJR’s strong selection criteria (only companies with at least 40% of their revenue from alternative energy-related activities are eligible).

The carbon intensity of old energy ETFs

Finally, putting into perspective, the carbon intensity of clean energy ETFs is only a fraction of the carbon intensity of old energy ETFs.

Using Fossil Fuel Funds data, we can compare side-by-side First Trust Global Wind Energy ETF (FAN), the clean energy ETF with the highest carbon intensity, and Vanguard Energy ETF (VDE).

Energy ETFsFossilFreeFuel RatingtCO2 (Scope 1+2)/M$ salestCO2 (Scope 1+2+3)/M$ sales
Vanguard Energy ETF (VDE)F3643,516
First Trust Global Wind Energy ETF (FAN)F6361,496

At first, looking at the carbon intensity of those funds, FAN seems to perform worse than VDE in carbon emissions. However, the number disclosed by Fossil Free Funds is based only on Scope 1 and 2 emissions. When using the absolute emissions from Fossil Free Funds for Scope 1+2+3 and extrapolating it proportionally to the ETF equivalent revenue, the resulting total carbon intensity (Scope 1+2+3) of Vanguard Energy ETF (VDE) is more than 2 times larger than the total carbon intensity of First Trust Global Wind Energy ETF (FAN).

Do clean energy ETFs perform better than traditional energy ETFs?

If the energy sector macrotrends and the sustainability argument are not sufficient to start investing in clean and green energy ETFs, let us then look at the financial performance of some energy ETFs:

Financial performance of clean energy ETF vs. oil & gas energy ETFs - TAN/ICLN vs XLE/VDE
TAN and ICLN vs. XLE and VDE, Financial returns YTD (Oct2020)

It is unfair to place side-by-side the returns of TAN and XLE/VDE. TAN is the best performer ETF in 2020 (so far), and XLE and VDE were already struggling with the fall of oil prices before the COVID crisis.

However, even looking 5 years back, it does not look good for the old Oil & Gas energy ETFs:

 3yr5yr
XLE-21.2%-12.9%
VDE-21.7%-10.9%
ICLN34.1%18.2%
TAN49.6%20.1%

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Conclusion: which clean ETF should you buy?

The selected 8 clean energy ETFs offer great diversity for investors to start allocating their capital into the new energy transition. The final decision on which ETF to buy will depend on investors’ preferences.

For example, we can segment the 8 clean energy ETFs by geographic and industry exposure:

Best clean energy ETFs - Allocation diagram

Investors looking for optimal diversification should focus on global ETF with exposure to more than one industry within the energy sector. The cheapest option in this segment is iShares Global Clean Energy (ICLN). Since ICLN is heavily weighted on renewable energy producers, it can be combined with Invesco Cleantech ETF (PZD) for additional exposure to companies in the clean technology industry and companies with stronger digitalization focus.

European investors can go either with the iShares Global Clean Energy UCITS ETF (tickers: INRG or IQQH) or the well-balanced and more conservative Lyxor New Energy UCITS ETF Dist (NRJ). The ETF has exposure to established renewable energy companies (Schneider Electric, NextEra Energy, and Iberdrola).

Investors willing to spend a bit more on fees could create their clean energy portfolio, combining Invesco Solar ETF (TAN) and First Trust Global Wind Energy ETF (FAN) with other single-industry ETFs. However, that would require an active management to constantly balance the portfolio and quick reaction to sudden changes in industry-specfic regualtions.

Check out our ESG ETF Database, to see a full list of ETFs and their ESG ratings compared side-by-side


Not an investment advice: The information provided on this website is intended for general information purposes only and does not constitute investment advice, financial advice, trading advice, or any other sort of advice. You should conduct your due diligence and, if necessary, consult a qualified independent financial advisor before making any investment decisions.

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Fernando

Fernando created Your Green Wealth to help investors find sustainable investing options. When not writing for Your Green Wealth, he is a business developer for renewable energy projects.

4 Comments

CT · December 2020 at 04:54

Thank you for this very detailed and helpful overview!

L · April 2021 at 15:59

Great article, thanks for doing the dirty (clean?) work! 🙂

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