First Trust NASDAQ Clean Edge Green Energy Index ETF Provides High US Exposure
Summary
- Under President Biden, companies related to the New Green Deal should benefit even if the Republicans control the Senate.
- Many Clean Energy ETFs have a large International exposure giving investors a choice where to focus their assets. This one is US-centered.
- QCLN provides a nice choice to make money and feel good while you are doing it. That said, the current price has me giving it a Neutral rating.
Introduction
Under President Biden, companies related to the New Green Deal should benefit. The Democratic Party kept the House but with a smaller margin, about half what they had before the election as I write this. Control of the Senate won’t be decided until early January when both Senate races in Georgia are decided. The Republicans need one seat to control; otherwise VP Harris has the tie-breaking vote. History says the President’s party usually looses seats in the Mid-Term election so that could play into how fast and long the United States tackles climate change and the stocks owned by clean energy funds benefit. Most stocks and funds have had a great run-up to the election so a correction could happen over the next few months.
Dissecting First Trust NASDAQ Clean Edge Green Energy Index ETF
This is how First Trust defines NASDAQ:QCLN:
The First Trust NASDAQ® Clean Edge® Green Energy Index Fund is an exchange-traded index fund. The objective of the Fund is to seek investment results that correspond generally to the price and yield (before the Fund's fees and expenses) of an equity index called the NASDAQ® Clean Edge® Green Energy IndexSM.
Source: First Trust
QCLN has $330m in AUM with a .60% expense ratio. This isn’t a fund for income investors as the yield is only .31%. The ETF started in early 2007.
To understand any index-based ETF, it is best to start by looking at their index. Unlike an actively-managed fund, the index will dictate the assets in the fund.
The Nasdaq Clean Edge Green Energy Index (CELS) is a modified market capitalization-weighted index designed to track the performance of companies that are manufacturers, developers, distributors, and/or installers of clean-energy technologies. Tracking U.S.-listed pure play companies active in the clean energy market, including renewables (solar & wind), energy storage, and electric vehicles.
Source: Index
Here is a list of the current index make-up:
Source: Index
The index site lists the following criteria for possible inclusion:
To be eligible for inclusion in the Index issuers of a security must be classified, according to Clean Edge, as technology manufacturers, developers, distributors, and/or installers in one or more of the following sub-sectors:
- Advanced Materials (silicon, lithium, bio-based, and/or other materials and processes that enable clean-energy and low-carbon technologies);
- Energy Intelligence (conservation, efficiency, smart meters, energy management systems, LEDs, smart grid, superconductors, power controls, etc.);
- Energy Storage & Conversion (advanced batteries, power conversion, electric vehicles, hybrid drivetrains, hydrogen, fuel cells for stationary, portable, and transportation applications, etc.); and
- Renewable Electricity Generation (solar, wind, geothermal, water power, etc.).
Recent index changes include three additions ( Blink Charging Co. (NASDAQ: BLNK), Orion Energy Systems, Inc. (NASDAQ: OESX), Workhorse Group, Inc. (NASDAQ: WKHS) ) and two deletions ( TerraForm Power, Inc. (NASDAQ: TERP), Vivint Solar (NYSE: VSLR) ).
This index predates the ETF by about one year.
Source: seekingalpha.com
So even though the ETF holds 45 stocks, 55% of the holdings are in the Top 10 stocks. Let’s take a quick look at the Top 5 as described on SeekingAlpha:
NIO: NIO Limited designs, manufactures, and sells electric vehicles in the People's Republic of China, Hong Kong, the United States, the United Kingdom, and Germany. The company offers five, six, and seven-seater electric SUVs.
SEDG: SolarEdge Technologies, Inc., together with its subsidiaries, designs, develops, and sells direct current (DC) optimized inverter systems for solar photovoltaic (PV) installations worldwide. Its SolarEdge system consists of inverters, power optimizers, communication devices, smart energy management solutions, and a cloud-based monitoring platform.
ENPH: Enphase Energy, Inc., together with its subsidiaries, designs, develops, manufactures, and sells home energy solutions for the solar photovoltaic industry in the United States and internationally. It also offers AC battery storage systems.
TSLA: Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, Netherlands, Norway, and internationally. The company operates in two segments, Automotive; and Energy Generation and Storage.
ALB: Albemarle Corporation develops, manufactures, and markets engineered specialty chemicals worldwide. The company operates in three segments: Lithium, Bromine Specialties, and Catalysts.
Since I do not follow these stocks, I will leave it to comments to add color as to whether they are good or bad investments at this time.
Renewable energy investment risk
All investments contain risk. Not being an expert in this area, I researched and found a paper discussing risks renewables face that other stocks might not (Paper). Here are the main points:
This how those risks ranked in 2017 when the study was done:
Source: Paper
Tis chart shows how the impact of each risk category changed over this time period. Technology and Policy risks have been replaced by Price and Curtailment risks as the top concerns.
My thoughts on what all this means to an investor
First is timing. Since its price peak shortly after launch in 2007, QCLN took until the middle of this year to break above that point - 12 years of negative returns for the early investors. Recent prices are the highest ever so an investor needs to be asking: Is this a good time to buy QCLN? I cannot answer that for you as my investing strategy could be different, but here are some points to ponder:
- Are you looking at clean energy funds more for growth or to feel good where your funds are invested? Many new ETFs have been started as demand for ESG, Social Values, and Climate Change funds have been sought after. If the latter, does today's high price matter?
- Are you looking at QCLN for a quick profit or as a long-term holding? The recent US election still might provide some pop. Long-term, is this the start of bull run in these stocks or will they continue to be very dependent on forces beyond their control?
- Are there companies in the Index that are heavily dependent on government tax breaks and other help? In the past Tesla car sales have plunged when the government-supplied rebates expired. Several Solar Cell companies went bankrupt when their US tax rebates ended.
- For companies in the Technology sector, are they industry leaders with proven products or depending on a break-thru to survive? Likewise, are they profitable today?
- Even if they pass the test of the prior point, is their value based on today's sales or some promised levels? Is Tesla really worth more than every other car companies’ combined market value? Maybe, that's your call.
- What's your assessment of the political climate not only here, but China and the rest of the world? It is highly likely the US will again embrace the Paris Climate Accords. Will we leave again in 2024 if the White House goes Red?
SeekingAlpha asks us to rate any stock/ETF we cover, from Very Bullish to Very Bearish. Due to my (key word) concern about the recent price spike and still uncertain political situation, the highest I can go is Neutral. Part of that is my risk-adverse nature too.
For those wanting to explore this arena more, SeekingAlpha shows the following Peers:
Source: Peers
Recent articles on the above include: PBW SMOG ICLN
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This article was written by
Retired Investor has been investing since the 1980s and has a background in data analysis and pension fund management. He writes articles to help others prepare for retirement by investing in CEFs, ETFs, BDCs, and REITs. He is a long only investor and shares strategies for trading options with a focus on cash-secured-puts.
He is a contributing author to the investing group Hoya Capital Income Builder. Hoya specializes in the portfolio management of publicly traded real estate securities and dividend ETFs. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
As with any article focused on a single fund, no investment advice is given or implied. Information presented should be used as a starting point as each investor has different needs and risk tolerance.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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