5 Top-Performing Clean Energy ETFs

Clean energy investment needs to triple by the end of this decade to mitigate climate change and keep energy market volatility under control, according to the International Energy Agency.

This forecast suggests that governments and other entities need to significantly boost their investments in clean energy such as wind, solar, hydrogen, battery storage, and electric vehicles (EVs). As a result, companies focused on green energy should prosper as more investment flows into the sector over the coming years.

However, investors often face a dilemma when assessing a long-term investment trend. They must decide how to best position their portfolio to profit from this upside potential. They could choose to invest in a specific alternative energy stock. However, they risk being right about the thesis (clean energy investment will rise) but invest in the wrong company that underperforms the sector over the long term.

A potential solution to this problem is to invest in an exchange-traded fund (ETF) focused on clean energy. That should reduce the risk of being right on the thesis but picking the wrong green energy stock to express that view.

5 top clean energy ETFs

Many ETFs focus on clean energy these days, given the amount of money flowing into the sector. Some take a broad approach by investing across the entire industry. Meanwhile, others focus on a single aspect of green energy investing. That gives investors lots of ways to use ETFs to invest in clean energy.

Here's a list of five of the top ETFs concentrating on various aspects of the clean energy sector:

Data source: Company websites. AUM figures as of Jan. 30, 2022.

Here's a closer look at these top clean energy ETFs:

iShares Global Clean Energy ETF

The iShares Global Clean Energy ETF focuses on global companies that produce energy from solar, wind, and other renewable energy sources. The fund entered 2022 with almost 80 holdings, led by the following five:

1. Vestas Wind Systems (OTC:VWDRY): 8% of the fund's holdings
2. Enphase Energy (NASDAQ:ENPH): 6.8%
3. Consolidated Edison (NYSE:ED): 6.8%
4. Orsted (OTC:DNNG.Y): 5.9%
5. SolarEdge Technologies (NASDAQ:SEDG): 4.6%

This ETF owns a broad array of clean energy companies, including businesses that manufacture components such as wind turbines and solar energy inverters and businesses that operate wind farms and solar energy facilities. The strategy allows investors to focus on companies concentrating on producing renewable energy.

However, it's worth noting that the fund concentrates its investments at the top. Its 10 largest holdings make up more than 50% of the fund. Because of that, a limited number of stocks will drive the fund's overall results.

The iShares Global Clean Energy ETF rates highly on environmental, social, and governance (ESG) factors. The fund has a AAA rating from MSCI, putting it in the 93rd percentile of all ETFs. Almost half of the fund's holdings have AAA or AA ratings from MSCI. That makes it an excellent option for socially responsible investors seeking an ESG fund.

The fund charges a relatively low ETF expense ratio of 0.42%.

First Trust NASDAQ Clean Edge Energy Index Fund

The First Trust NASDAQ Clean Edge Energy Index Fund focuses on clean energy companies that trade on major U.S. stock exchanges. It holds companies that manufacture, develop, distribute and install clean energy technologies such as solar, wind, battery storage, fuel cells, and electric vehicles (EVs). The ETF held more than 60 companies in early 2022, led by the following five:

1. Albemarle Corporation (NYSE:ALB): 8.8%
2. Tesla (NASDAQ:TSLA): 8.6%
3. ON Semiconductor (NASDAQ:ON): 8.5%
4. NIO (NYSE:NIO) 6.4%
5. Enphase Energy: 5.7%

This ETF also concentrates its investments among its largest holdings. However, it still offers investors diversified exposure to the clean energy sector but with more of a focus on the electrification of transportation and the energy sector. Its holdings include companies in the renewable energy equipment (21%), automobiles (19%), semiconductors (18%), alternative electricity (13%), chemicals (10%), alternative fuels (3%), mining (3%), electronic components (3%), and electrical components (2%) industries.

The First Trust NASDAQ Clean Edge Green Energy ETF has an A rating on ESG from MSCI. Overall, it ranks in the 51st percentile of global ETFs on ESG factors.

The fund has a reasonable ETF expense ratio of 0.6%.

Invesco Solar ETF

The Invesco Solar ETF focuses on companies in the solar energy industry, including those that manufacture panels and electrical components and install solar energy systems. The ETF had more than 40 holdings in early 2022, led by the following five: 

1. SolarEdge Technologies: 9.8%
2. Enphase Energy: 9.2%
3. First Solar (NASDAQ:FSLR): 7.3%
4. Xinyi Solar: 6.5%
5. Sunrun (NASDAQ:RUN): 6%

This ETF's focus on solar enables investors to invest in a basket of the top solar energy stocks. It also offers geographic diversification (fewer than half the fund's holdings are U.S.-listed companies) and some sector diversification (55% of its holdings are information technology companies, 25% are utilities, 15% are industrials, 3% are financials, and 2% are materials). That means it's an ideal ETF to make a directional bet on the upside of solar energy investment. 

The Invesco Solar ETF ranks highly on ESG, with an AA rating from MSCI. Overall, it ranks in the 68th percentile of global ETFs on ESG factors. 

The fund charges a reasonable expense ratio of 0.6%.

Invesco WilderHill Clean Energy ETF

The Invesco WilderHill Clean Energy ETF concentrates on companies listed on U.S. stock exchanges engaged in advancing clean energy and conservation. The ETF entered 2022 with almost 80 holdings, led by the following five companies:

1. REE Automotive (NASDAQ:REE): 1.8%
2. Sunlight Financial (NYSE:SUNL): 1.7%
3. Sunnova Energy (NYSE:NOVA): 1.5%
4. JinkoSolar (NYSE:JKS): 1.5%
5. Ormat Technologies (NYSE:ORA): 1.4%

This ETF has an equal-weight strategy, investing a similar amount across a broad array of clean energy companies. This strategy allows investors to take a broad approach to clean energy. The fund holds companies involved with solar energy, EVs, geothermal energy, energy storage, wind energy, and climate tech. The bulk of its holdings are U.S. companies (75% of the fund's holdings). Meanwhile, it offers some diversification across sectors (industrials at 45%, consumer discretionary at 19%, IT at 17%, materials at 9%, utilities at 6%, energy at 2%, and financials at 1%).

The Invesco WilderHill Clean Energy ETF doesn't have an ESG rating from MSCI. However, many of its holdings have a strong environmental focus, given their strategies of developing or producing clean energy or reducing carbon emissions.

This ETF has a reasonable expense ratio of 0.61%.

First Trust Global Wind Energy ETF

The First Trust Global Wind Energy ETF focuses on wind energy. It holds two types of wind energy companies: 

• Pure-play companies that get at least 50% of their revenue from wind-related activities (60% of the fund).
• Diversified companies that have some involvement in the wind industry (40% of the fund).

This fund had almost 50 holdings in early 2022, led by the following five:

1. China Longyuan Power Group Corporation Limited (OTC:CLPXY): 8%
2. Northland Power (OTC:NPIFF): 6.8%
3. Orsted: 6.3%
4. Vestas Wind Systems: 6.2%
5. Siemens Gamesa Renewable Energy (OTC:GCTAY): 5.5%

This ETF's focus on wind energy makes it ideal for those who want to invest specifically in the growth of the sector. It also offers broad geographic diversification and exposure to diversified companies with some wind activities to complement its wind energy pure plays.

The First Trust Global Wind Energy ETF rates highly on ESG factors, with a AA rating from MSCI. Overall, it ranks in the 80th percentile of all ETFs on ESG factors, and more than half the fund's holdings have AAA or AA ratings from MSCI. 

The ETF has a reasonable expense ratio of 0.67%.

Clean energy ETFs offer a broad approach to investing in the sector

These ETFs allow anyone to easily invest in one or more aspects of clean energy. Some focus on a specific type of alternative energy such as wind power, while others offer broader exposure across the entire clean energy investment landscape. That allows investors to target a green energy trend, which should help reduce the risk of picking an underperforming clean energy stock.

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