In recent years, climate protection has become increasingly important and the issue of climate change has come into sharp focus. The energy transition is intended to encourage countries to move away from fossil fuels and embrace renewable energy. As a result, investors are wondering whether they can benefit from the energy transition. In this article, we look at what ‘ETF Clean Energy ’ mean, how they are structured, and whether they could present an opportunity for investors.

In brief:

In this article, we explain why society and politicians are committed to reducing the use of fossil fuels and expanding renewable energy technologies
We’ll be looking at exactly what a clean energy ETF is and the arguments for and against investing in one
To go with this, we’re introducing you to three funds in the clean energy sector and showing you the key performance indicators and how they’re structured

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Contents Hide

1 What are clean energy ETFs?

2 These clean energy ETFs are available

3 Conclusion: The Clean Energy ETF as an opportunity

What are clean energy ETFs?

Before we look at the various exchange-traded funds available in this sector, this section will examine why the energy transition is taking place and exactly what clean energy ETFs comprise.

Away from fossil fuels

Over millions of years, the decomposition products of organic matter, such as animals and plants, are transformed into dead biomass as a result of geological processes, such as high pressure and temperature. Fossil fuels, such as crude oil, natural gas and coal, are extracted from these carbon-based materials.

Fossil fuels are characterised by their high energy density and are a central component of human infrastructure. The large amounts of energy are stored in the form of hydrocarbon bonds.

Large power stations are used to burn hard coal and lignite
These types of coal are ground beforehand
In this combustion process, water is heated, producing steam which can convert thermal energy into electrical energy

When these substances burn, they produce CO₂, which you’re no doubt familiar with as a greenhouse gas. Greenhouse gases are necessary in certain quantities and are present in the atmosphere. They trap heat that would otherwise escape into space. Without this heat, temperatures on Earth would be significantly colder.

The large quantities of fossil fuels being burned result in unnaturally high levels of CO₂. This high concentration is harmful and causes a great deal of heat to be trapped, leading to significant global warming.

Good to know:

Another problem is that fossil fuels are finite. Experts believe that they could be exhausted as early as this century. We therefore need other forms of energy, known as renewable energy.

These forms of renewable energy include wind power, solar power, biomass and hydroelectric power. An increasing number of governments are championing the energy transition and investing in related measures, including Germany. This sends an important signal to investors and highlights just how significant such technologies could be in the future. If you’re interested in ETFs for sustainable energy generation, then have a read of my articles on solar ETFs or ETFs for electric mobility.

Share of renewable energy in gross electricity consumption

What are clean energy ETFs?

ETFs are exchange-traded funds that are based on an index. Their composition is therefore predetermined. The aim is to track the index as closely as possible and to benefit from the average return of the relevant market.

Clean energy ETFs focus on the clean generation of energy from wind, solar and hydro sources. Such funds are also often referred to as renewable energy ETFs.

The companies involved are very diverse and are active in the renewable energy sector in one way or another
These include, for example, electricity network operators, administrators, IT companies and manufacturers of specialist components
This also includes industrial groups that specialise in the manufacture of wind turbines, fuel cells and solar panels

It is important to note that many of these technologies are still in their infancy. It is therefore unclear which ones will succeed and become established, and which will not. Research is continuing in many areas. Only time will tell which approaches will prove most effective, which suggests that this may be a risky investment.

Furthermore, a clean energy ETF falls within the category of thematic ETFs. These focus on promising technologies and specific sectors that could play a significant role in the future. However, it is impossible to predict how these sectors will develop. Moreover, they are characterised by low diversification, as they all focus on the same industry, which can significantly increase the risks involved.

Benefits of the Clean Energy ETF	Disadvantages of the Clean Energy ETF
Ethical investment	The total expense ratios are high, as is typical for thematic ETFs
Through their climate targets, governments are committing to an energy transition and are playing a key role in promoting it through policy measures	Despite attractive opportunities and prospects, it is unclear how the sector will develop
Investors can contribute to the long-term energy transition through their investments	These ETFs are not highly diversified and are only suitable as a supplement to a broadly diversified portfolio, as otherwise there are significant risks involved
In recent years and decades, the issues of sustainability and environmental protection have become increasingly prominent and important to the public

These clean energy ETFs are available

Below, we present a selection of clean energy ETFs. This selection is limited and is intended merely to give you a brief overview of sustainable ETFs.

The first fund is the iShares Global Clean Energy ETF. It comprises 30 companies involved in the production and supply of clean energy. In line with sustainability criteria, the provider has excluded companies whose carbon emissions exceed a certain threshold.

As regards the breakdown by country, around 30 per cent of the companies are based in the US, followed by China and Denmark
The ETF’s TER stands at 0.65 per cent, which is significantly higher than that of globally diversified funds, as is often the case with thematic ETFs
The fund’s assets under management amount to over 3 billion US dollars
This is a distributing fund

An alternative to this fund is the Lyxor MSCI New Energy ESG Filtered (DR) UCITS ETF Dist. It comprises companies that develop services and products in the clean energy sector. These include, for example, grid technologies and batteries. Companies that breach the UN Global Compact or ESG guidelines are excluded.

The fund holds 87 positions and is therefore more diversified than the iShares fund
Furthermore, it is heavily weighted towards the US, accounting for over 37 per cent, followed by Spain and Denmark
The TER is 0.60 per cent; the ETF pays out dividends and is physically replicated

Another example is the Invesco Global Clean Energy UCITS ETF. This fund focuses on companies involved in the generation of wind, solar and hydroelectric power. Clean energy storage and the expansion of the relevant infrastructure also play a role. In addition, there are manufacturers of the components required for the construction of wind turbines and generators.

The Invesco fund has a total expense ratio of 0.60 per cent and is a reinvestment fund
The fund has assets under management of US$58 million
The ETF is physically replicated and invests in over 100 holdings
The US is slightly less heavily represented in this fund, accounting for over 25 per cent, followed by Taiwan with over 8 per cent and South Korea with over 7 per cent

Conclusion: The Clean Energy ETF as an opportunity

Electricity can be generated by burning fossil fuels such as coal, oil or natural gas. These fossil fuels offer the advantage of high energy density, but they also have harmful effects on the environment:

Their combustion produces unnaturally high levels of the greenhouse gas CO₂, which, in high concentrations, traps a great deal of heat on Earth that would otherwise escape. This causes the Earth to warm up. Furthermore, fossil fuels are in limited supply, which is why alternatives must be found.

Renewable energy sources, such as wind and hydroelectric power, offer alternatives to this. A clean energy ETF comprises companies active in the generation and storage of such energy.

Growing interest from the public and governments is leading to measures that provide state support for the expansion of renewable energy. This is a positive sign for investors and shows that such an investment can certainly offer opportunities.

However, there are also risks involved. Thematic ETFs such as these are not highly diversified and carry an increased level of risk. Furthermore, it is unclear how the sector will develop in the future and which technologies will ultimately prevail. Some of these technologies are still in their infancy, and research is ongoing to find efficient solutions.

If you’re interested in investing, you should only invest a small amount. Furthermore, these specific ETFs are not suitable for beginners, but rather for experienced investors who already have a globally diversified portfolio. Such investors can benefit from these funds due to their attractive potential returns and the additional diversification they offer. Find out more here.

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FAQ – Frequently asked questions

Is a clean energy ETF worth it?

An increasing number of countries are committing to an energy transition. Political measures are being taken to move away from fossil fuels and generate renewable energy from wind, solar or hydro sources. The political and social commitment makes this a compelling investment. However, there are also reasons against it: these are narrowly focused thematic ETFs, which are significantly riskier. Furthermore, it is impossible to predict how these sectors will develop in the future.

What is a clean energy ETF?

An ETF is an exchange-traded fund based on an index. A clean energy ETF comprises companies operating in the clean energy sector. The range is diverse: such a fund includes utilities, IT companies and, for example, manufacturers of technologies such as wind turbines, hydroelectric power stations and components.

ETF Clean Energy – How investors can benefit from climate protection

What are clean energy ETFs?

Away from fossil fuels

What are clean energy ETFs?

These clean energy ETFs are available

Conclusion: The Clean Energy ETF as an opportunity

FAQ – Frequently asked questions