Investing in green ETFs – What you need to know
Today’s investors are more climate-conscious and aware than ever. More investors look to share their part towards socially responsible investments. We all owe our contribution to this world for making it a better place. The good news is the world is taking steps to go green. The much-needed private and public sector collaboration on creating green and clean energy is underway. Despite some challenges with economic recessions; the future renewable energy demand is predicted significantly higher.
As an Investor, you seek god returns, and rightly so. A high return on investment also indicates that your investment is utilized efficiently by the fund managers. Either you can invest as a private business angel, or invest in derivatives.
Why Consider Investing In Green Energy At All?
You want to make an impact, play your part with socially responsible investment. But let’s explore if the sector has a future. That’s one responsibility that you share with the investee, to analyze the investment options before committing money.
One measure of analyzing a potential investment sector is to keep an eye on the future forecast demand. According to the International Renewable Energy Agency (IRENA), the planned Renewable energy share is to reach 65% of the total energy consumption.
The world is adapting to renewable energy. If the plans go ahead, 65% of the total energy needs will be met by renewable, green energy by 2050.
Green Energy Sector Investment Growth Forecast:
The global investment requirements for the renewable energy sector are hard to predict. The private sector’s investment share has seen significant upwards trends. As for the planned cumulative investment needs in the renewable energy sector, the IRENA estimates it above $110 billion by 2050
Both of these metrics indicate huge investment potential and growth opportunities in the green energy sector. Suggestively, Investors’ share of wealth rises with growing investments, rather than stable and slow growth ones.
Another advantage of investing in the renewable energy sector is the potentially varied technologies within the same sector. Both private and public companies are investing in various technologies, Hydropower, wind energy, and solar energy being the most prominent ones. It also indicates a great potential growth opportunity for non-traditional technologies like biogas and Marine energy. Now that you’ve ticked all boxes for investment opportunities with the green energy sector, let’s explore some options on making investments.
How to Invest in Green Energy?
You may consider investing in green companies with individual stocks, mutual funds, and Exchange-Traded Funds. Each option comes with a unique risk-reward relation. While stock investment lures many investors, it remains a highly risky option. If you’re looking for passive income option then Mutual Funds and ETFs remain the best bets. While Mutual Funds can be good with Passively Managed Index funds, ETFs offer great control options.
You can create a Portfolio of selective investments for you too. Various investments diversify the risks and naturally hedge against market swings. A portfolio mix of green energy stocks, bonds, mutual funds, and ETFs can offer a flexible yet rewarding investment strategy.
But, what about the costs? How do you select the right stocks? Mutual funds and ETFs comprising of a novice and growing sector stocks?
The notion of ETFs being managed as passive investments is an old one. A growing number of ETFs are now actively managed by Fund Managers. The returns with green sector ETFs are also promising. (More on that below)
Green Investment with ETFs:
Particular Exchange-Traded Funds support green and renewable energy stocks. Some ETFs comprise of the Green Sector companies; others invest in for the research in the sector. ETFs committed to Green and Renewable energy have grown in assets exceptionally well in the last few years. The growing market size apart, the assets managed by these Exchange-Traded Funds have grown to a remarkable size. For example, Blackrock’s ishare ETFs ESGU and ESGE now hold $ 10.4 billion and $ 4.02 billion as Asset under Management section. The rates of return for these ETFs are also on the higher side, with current 3 months yield of 9.58% and 5.47% respectively. Similarly, ishare Global Clean Energy ETF (ICLN) now holds $ 2.01 billion of assets.
Renewable Energy and Green power generation aren’t limited to electricity generation only. Environment-friendly investments also include promising sustainable investments considering lower waste, low carbon emission, and clean water resources. Increasing trends of Green ETFs today comprise holdings in a wide variety of environmental friendly firms. The broader range of holdings offer flexible and diversified investment options, as well as, meet the growing capital raising demands for these companies.
The number of ETFs with environmental, social, and corporate governance as prime criteria has gained popularity recently. Although there can be no definitive list to choose from potentially hundreds of investment options, here are a few of the top performers with the ESG criteria.
Why Choose ETFs for Investment?
Exchange-traded funds connected with socially responsible investment options offer great value for investors. These funds combine the benefits of diversified risk of ETFs and the staggering market growth of the renewable energy sector. Emerging markets usually perform higher growth than stable markets with slow growth. Investors looking for quick gains can also make better returns with growing investment options.
Investments with ETFs are more suited to the investors looking for long-term capital gains. Many Exchange-traded funds are now managed actively by fund managers that closely monitor the holdings’ performance. Lowers costs such a low expense ratio aside, ETFs offer flexibility and higher returns over long-term than individual stocks.
Here are a few compelling reasons for you to consider investing in Green ETFs.
Actively Managed ETFs:
Passively managed ETFs still exist and make up a large portion of the total market share. The rising trend is with actively managed Exchange Traded Funds. ETF issuers look for a wider pool of investments to include the total fund basket. Tracking past performance and historical data indicators no more reveal the full picture for investments. Issuers are keener in forward looking investment plans with investing in companies with more ambitious plans.
ETF fund managers play an important role in managing these funds. They conduct thorough market research on the selection and composition of the portfolio. A well-managed portfolio comprises of high growth stocks, stable bonds, and liquid investments.
Diversified Investment Risk:
The biggest advantage that comes with actively managed Exchange-Traded Funds is the diversification. ETFs offer low-risk investment options in contrast to individual stocks. A wider selection of stocks and financial securities offer a natural hedge against market risks. Normally, an actively managed ETF will include stocks, bonds, and treasury notes. Also, sector and International ETFs offer a diversified portfolio of investments.
As a retail investor, you may build a diversified portfolio of ETFs yourself too. You can choose between domestic and international ETFs. As shown in our list, various ETFs invest in different technologies. For example, you may consider investing in VanEck’s NLR (Nuclear and Uranium) and Invesco’s Solar TAN ETF options. Both ETFs fall under the broader ESG category but are fairly diversified with different technologies altogether.
Higher Liquidity with Lower Costs:
Even with emerging Exchange Traded Funds like in the renewable energy sector, the expense ratio falls below 1.00%. Higher expense ratio funds offer higher cumulative yield as shown in our data table above. For example, Invesco Global Clean Energy ETF (PBD) comes with a higher expense ratio of 0.75%, but it offsets the deficit with a staggering 74% yield to date ratio. Additionally, most of the ETFs issuers offer zero commission with investments.
Exchange-Traded Funds enjoy higher liquidity than Mutual Funds because they trade all day long. Investors may sell or buy ETF units at any given time in a trading day, unlike Mutual Funds. Diversified investment portfolio and trade availability makes the price fluctuations lower with ETFs as compared to individual stocks. In a sense, ETFs are as liquid as individual stocks, certainly much higher than Mutual Funds or Bonds.
Tax Advantage and Higher Yield-to-Date:
Realistically, you can enjoy lower capital tax gains with Exchange-Traded Funds if you invest for longer-terms. Many investors trade ETFs much like individual stocks to realize quick gains through short-selling. ETFs offer lower tax rates on regular income too as they usually offer dividends in non-cash or in-kind form. You can best take advantage of lower tax rates with ETFs if you invest for a longer period.
Exchange-Trade Funds offer higher YTD, for example, Invesco’s TAN YTD is 137%. Along with active fund management, dividend reinvestment in the fund substantially increases the returns. The reinvested dividends yield higher cumulative interest depicting much like a snowballing effect.
The Bottom Line:
Exchange-Traded Funds in any sector or asset category offer a diversified and low-risk investment option. An environmentally conscious investor looking to combine social responsibility and investment rewards should consider the Green ETFs. Most of the renewable energy sector ETFs represent emerging firms and come from a sector with growing market demand.