The Five Energy ETFs Investors Are Buying To Power Their Portfolios

The ongoing momentum and institutional investment in the energy sector have given investors a seemingly ever-increasing number of alternative investment options, including stocks and exchange-traded funds (ETFs). 

In the last few years, governments have been pushing new legislation and policies to promote investment in cleaner and greener energy, hoping to stay on track with their sustainability efforts. 

Categories such as wind and solar energy have seen accelerating growth in more recent years, with corporations and governments now ramping up their decolonization efforts. At the same time, electric vehicle (EV) manufacturers have also experienced widespread adoption, as a growing number of legacy automakers are electrifying their production line-ups. 

In a 2022 report by the International Energy Agency (IEA), it was found that the fastest growth in energy investment stemmed from the power sector. The largest portion of investment dollars was directed towards renewables and grids, with a growing part thereof coming from energy efficiency. 

While wider economic challenges remain, including aggressive interest rate hikes by the Federal Reserve to bring down stubbornly high inflation, a cooling labor market, the recent banking turmoil, and mass layoffs in the once red-hot tech sector; investors are now willing to tilt their portfolios towards industries that provide them with new performance objectives. 

Energy ETFs in a nutshell 

Following a tumultuous turn of events in more recent months, leading to an overall decline in economic momentum after witnessing a strong start to the year, investors are seeking alternatives that could provide them with growth and peace of mind against the backdrop of a looming recession. 

The energy sector, seeing a great deal of change and investment coming from institutional players now provides investors with a growing number of opportunities. 

Widespread demand for alternative energy sources, including wind, solar, and hydrogen has helped spark mainstream adoption, leading to newer and bigger project development. 

The attractive performance also comes at a time when oil and commodity prices have declined since peaking in mid-2022. Other factors, aside from decarbonization efforts, including soaring energy costs, which have seen consumers paying 14.3% more throughout last year than in 2021, have also driven more consumers to seek out alternatives to their current demand for fossil fuel. 

Technology and software applications also played their part in the growth of the energy sector, more so in terms of energy consumption, storage, and distribution efforts on grids. 

Better advancements have made it increasingly possible for the energy sector to move away from its traditional plug-and-play methods, and move into a new era of cleaner and more reliable energy production. 

Across the industry, these efforts have been trailed by numerous companies looking to revolutionize and potentially decarbonize the energy sector in the coming years. 

This, however, has made the work of investors harder, and more difficult to find companies or stock picks that align with their investment goals and portfolio objectives. Other macro trends also affect all the moving parts of the energy sector, and for investors, it’s crucial to find investments that are both worth their time and money. 

The five best energy ETFs investors are buying 

With the energy sector becoming increasingly diverse, and with corporations seeking more sustainable alternatives, some well-performing ETFs are made up of a mirage of clean energy stock picks, while still holding onto legacy energy names. 

Invesco Solar ETF 

The Invesco Solar ETF (NYSE: TAN) has a blend of roughly 54 total holdings, with an average pay-to-earnings (P/E) ratio of 69. This solar ETF has become one of the most popular and widely regarded green energy investment funds, especially for investors looking to tap into the solar energy sector. 

Holdings in the ETF include Enphase Energy (NASDAQ: ENPH), SolarEdge Technologies (NASDAQ: SEDG), and FirstSolar (NASDAQ: FSLR), among others. The majority of the fund’s investments are allocated to companies and manufacturers based in the United States, while roughly 18% is directed to Chinese solar panel manufacturers.

As of March 31, 2023, the fund had more than $2.41 billion in net assets and has reported strong, yet steady growth over the last several years. Five-year growth was at 26.29%, while in the last three years, the fund jumped upward by 45.34%. 

While the fund is predominantly directed at solar production and manufacturing, it’s perhaps a strong contender for those who are looking for sustainable alternatives to their portfolios. 

First Trust NASDAQ Clean Edge Green Energy Index Fund

Something a bit broader, the climate-focused fund by First Trust tracks the NASDAQ Clean Edge Energy Index and includes different assets such as renewable energy, clean tech, and semiconductor manufacturing, among other things. 

One thing to keep in mind though is that all companies in the fund are listed on the NASDAQ stock exchange, so most of the stock picks will be tech-heavy. 

Big names such as Tesla (NASDAQ: TSLA), ON Semiconductor (NASDAQ: ON), and Albermarle (NYSE: ALB) are some of the stocks included in the fund. Most of the companies that make up the First Trust fund are growth companies, with a majority of the allocation geared towards these high-performing clean tech companies. 

There is however a bit of risk with First Trust, as some asset allocation is directed to smaller tech companies that operate in sustainability. While there is a lot of potential for these companies in the coming years as the industry grows and expands, some of them have yet to be very profitable. 

The last three months saw the fund jump by 10%, but more recent performance has been slowed by 2.78%. This is largely due to its Nasdaq-heavy stock picks and the broader decline of the tech industry over the last several months. 

VanEck Green Infrastructure ETF

An ETF with more of a traditional investment approach, VanEck Green Infrastructure (NASDAQ: RNEW) focuses on energy investing that tracks the Indxx US Green Infrastructure-MCAP Weighted Index. 

Although RNEW is relatively new, debuting in October 2022. With this in mind, it’s clear why the fund manages to balance between equity-based, passive ETF trading, while including stocks that are fresh and new on the market in terms of energy production and storage. 

The fund has roughly 48 holdings, including companies such as FirstSolar (NASDAQ: FLSR), Tesla (NASDAQ: TSLA), Cheniere Energy (NYSE: LNG), Lucid Group (NASDAQ: LCID), and Enphase Energy (NASDAQ: ENPH), among others. 

Year-to-date (YTD) performance has jumped by 6.02% according to recent publications on the fund’s website. 

An overview of the fund shows that it’s increasingly looking to engage with companies and businesses that focus on sustainability efforts, including new-generation fuel cells and alternative fuel production, among other industry categories. 

Vanguard Energy ETF 

For something different, that is less focused on sustainability and green energy, the Vanguard Energy ETF (NYSE: VDE) tracks the Spliced US Investable Market Energy 25/50 Index. 

The index itself is diverse, holding more than 110 different companies and stocks, spanning different industries, including, oil and gas drilling, services, production, refining, marketing, and transportation, among others. 

With such a diverse range, it’s evidence that the Vanguard Energy ETF provides investors with more peace of mind, and a broader appeal to large-scale portfolio diversification. Currently, more than 50% of the ETF holds assets in major oil and gas producers, but for more frugal investors, you’d be happy to know that its expense ratio hovers at 0.1%.

Currently, the fund holds 22.8% of its weight in Exxon Mobil Corp (NYSE: XOM), with another 15.1% allocated to Chevron Group (NYSE: CVX)

Perhaps not the greenest and most sustainable picks for investors that are looking for more alternatives, it remains a sought-after ETF that provides substantial returns for investors. 

YTD performance stands at below 2%, while five-year growth has increased the ETF by more than 20%. 

KraneShares Electrification Metals ETF

KMET or KraneShares Electrification Metals ETF is unique in that it tracks the Bloomberg Electrification Metals Index. The key selling point of KMET is that it’s more of a commodities-based ETF that has steadily taken advantage of the accelerating electric car industry. 

KMET (NYSE: KMET) is largely made up of aluminum, copper, nickel, zinc and cobalt, and lithium. These are all essential elements required to produce important components for electric vehicles. It’s worth noting that close to half of the ETF is made up of copper and nickel.

Ongoing demand for metals, including copper, cobalt, and lithium has seen surging prices in recent years, partly due to ongoing demand for EVs and supply chain constraints caused by the pandemic and geopolitical tension. 

There is a strong performance in what KMET has to offer, especially for investors that are looking for ETFs that combine energy, sustainability, and commodity all at once. It’s rare to find ETFs that check all these boxes. 

Commodity prices have been fluctuating as prices remain high due to demand and tight labor market conditions in mining and manufacturing countries. There is however a growing opportunity for KMET, as it knits itself closely to the alternative energy industry, without having to fully commit to sustainable companies or green stock picks. 

The takeaway 

It’s become harder for many investors to build a diversified portfolio that captures the importance of change, advancement, and innovation. Solely relying on the tech and software industry to provide a sense of digital diversification has proven to be difficult in recent months. 

Looking at how traditional industries, in this case, the energy sector, has evolved over the years shows a different approach that could help to provide better and more intuitive growth for investors. 

While the energy sector hinges on traditional forms, there has been a lot of time, money, and effort invested in building a sustainable and futuristic industry that will give both consumers and investors something to get excited about.