What are green ETFs?
Today’s investors have access to a growing number of greenfields exchange traded funds (ETF), allowing them to incorporate environmentally friendly strategies into their investment decisions. ETFs are mutual funds that trade on a stock exchange. Investors can choose from a wide variety of ETFs, from those that track a major market index to funds that track a basket of foreign currencies.
Another type of ETF is the green ETF, which focuses on companies that support or are directly involved in environmentally responsible technologies. For example, some ETFs may focus on companies that develop alternative energy or manufacture energy-efficient equipment and devices.
Key things
- Green ETFs invest in companies that support socially and environmentally conscious policies and business practices.
- These ETFs allow investors to gain access to a diversified portfolio of companies, making green investing easier.
- Examples of pro-environment businesses found in green ETFs include those involved in promoting green transportation, alternative energy, and sustainable agriculture.
- Green ETFs may only invest in companies that focus on a specific technology, or they may have broader criteria.
- There is no single definition of what makes a company “green,” so investors should consult the fund’s prospectus to decide whether the fund’s values align with their own.
Understanding Green ETFs
Green investingwhether it refers to ETFs, mutual funds, or individual stocks, it refers to investment activities that focus on companies whose businesses support or promote conservation efforts, alternative energy, clean air and water, and other environmentally responsible business decisions.
Most green ETFs focus on companies involved directly or indirectly in the research, development, production and provision of alternative energy. Companies can be distributors of alternative energy or manufacturers of parts and equipment needed to produce energy, such as the photovoltaic cells necessary to make solar panels. Each ETF has its own criteria for determining asset eligibility requirements.
Most brokers will provide an ETF screener that allows investors to choose from a variety of environmentally focused funds.
Special considerations
Many new businesses can go green from the start, but established companies may have to work extremely hard to develop environmentally friendly practices. Automakers are a good example: the same company that makes gas-guzzling SUVs can also be at the forefront of hybrid and electric cars.
So what makes a company or ETF green? Currently, there are no strict rules regarding which companies or investment vehicles are officially green. Many considerations are a matter of opinion. For example, some people see nuclear power as a clean and green energy choice, while others argue that toxic waste prevents it from being environmentally responsible. In general, it is up to each investor to decide whether a fund is green by their standards.
Some “clean” ETFs contain securities of oil and auto companies because these companies devote some of their research to alternative energy. Investors should research whether the ETF matches their values. This information should be listed in the fund prospectus.
Types of Green ETFs
Although each investor must decide whether an investment is green, a growing number of ETFs are centered around companies that actively engage in Research and Development alternative energy sources – specifically clean energy, wind, solar and nuclear energy.
Broad Clean Energy ETF
Broad clean energy exchange-traded funds are involved in the alternative, renewable and clean energy sectors. ETFs based on broad clean energy include:
- Invesco WilderHill Clean Energy ETF (PBW): This fund is based on the WilderHill Clean Energy Index. The fund selects companies focused on greener and renewable energy sources and technologies that enable cleaner energy. The fund focuses largely on holdings small cap company and implements a growth strategy investment approach.
- iShares Global Clean Energy Fund (ICLN): This fund allocates its holdings to alternative energy, including solar and wind, and to biomass, ethanol and geothermal electricity companies. Its top sector is semiconductors and semiconductor devices with additional exposure public services sector.
Wind Energy ETFs
Wind power converts wind energy into other forms of useful energy. Wind turbines are used to generate electricity, windmills create mechanical energy, and giant sails can be used to provide thrust for ships. Wind power generation has increased, and as of 2021, 115 countries have some level of commercial wind power capacity. ETFs based on wind energy include:
- The First Trust Global Wind Energy ETF (FAN): This ETF is based on the ISE Global Wind Energy Index. The security component must be actively involved in some aspect of the wind energy industry, such as the development of a wind farm or the distribution of wind-generated electricity. Many of the holdings in this ETF are non-US companies and, as a result, this ETF contains ADR, GDR and EDR.
Solar ETFs
Solar energy uses the sun’s energy and converts it into electricity, either directly using photovoltaic cells or indirectly using concentrated solar power (CSP). Germany, China and Japan are among the world leaders in solar innovation. Price drivers for solar ETFs include oil prices (which are generally positively correlated), Govt subsidy and incentives and technological development. Solar-based ETFs include:
- Invesco Solar ETF (TAN): This ETF is based on an index (MAC Global Solar Energy Index) that tracks companies involved in the production of solar energy equipment, production of manufacturing products or services, and companies that supply the raw materials used in solar panels. power equipment manufacturers.
Nuclear Energy ETF
Nuclear power represents a rapidly growing percentage of global electricity. Despite historical setbacks such as the Fukushima Daiichi (2011) and Chernobyl (1986) incidents, energy companies and miners have begun to focus their resources on uranium and nuclear power. ETFs based on nuclear power include:
- Global X Uranium ETF (URA): This fund aims to replicate the performance, before fees and expenses, of the Solactive Global Uranium & Nuclear Components Total Return Index. The fund focuses on uranium mining, is heavily weighted in Canadian companies, and benefits from demand for nuclear material.
Why do green ETFs have higher expense ratios?
Some ETFs with a strong environmental focus may have a higher ratio than similar funds in the same category. This is probably due to the management costs involved in selecting investments: before investing in a security, fund managers must research a company to see if it actually meets the fund’s ESG criteria. In addition, because these companies tend to be smaller and more volatile, the fund will need to rebalance its portfolio more often.
What is the purpose of investing in green technologies?
In addition to the social benefits of supporting green technologies, green investors also hope to profit from buying shares of companies with a bright future. For example, solar investors reaped high rewards in the mid-2000s when solar companies made substantial profits.
How do you know if an ETF is green or not?
There is no single definition for the word “green”. Some “green” funds may invest in companies that explore alternative energy, even if those companies also work with fossil fuels. Others can only invest in companies with a low carbon footprint. As there is no objective definition, investors should decide for themselves whether a fund meets their environmental criteria.
Bottom Line
This article highlights just some of the green ETFs available to investors today. Interested investors can further research green ETFs by speaking with a qualified financial advisor.
Many green investment involve newer and smaller companies, which often equates to larger ones volatility and/or poor performance. This means that as these companies gain traction and the need for alternative energy is further realized and regulated, green investing is likely to become an increasingly stable platform for investors.
