Investing in ASX renewable energy ETFs

Renewable energy ETFs are a great way to gain diversified exposure to global green energy companies. In this article, we explain what clean energy ETFs are and how you can use them to invest in companies leading the global fight against climate change.

What is renewable energy?

Renewable energy – sometimes called clean or green energy – is created from sources that are not depleted as they are consumed.

For example, solar panels convert the light and heat of the sun into electricity – but this process doesn't reduce the amount of energy stored in the sun. 

Similarly, generating power from wind turbines doesn't mean there's less wind in the world. The sun will still shine and the wind will blow for billions of years to come.

We can contrast renewable energy with fossil fuels like coal, natural gas and oil. Only a finite amount of these energy sources are available to us, and once we use them all up, they're gone – we can't just create more of them.

And not only that but burning fossil fuels creates the pollution that causes climate change. This makes reducing our reliance on fossil fuels the most critically important thing we can do to fight climate change and protect the environment.

What are ETFs?

Exchange-traded funds (ETFs) are investment funds that trade on the stock market similarly to ordinary shares. You can buy and sell units in an ETF just like you would for company shares.

An ETF raises money from many different investors – including institutional – and uses this cash to invest in a portfolio of assets. This makes ETFs a great, low-cost way for everyday investors to diversify their investments – in a single trade.

Each ETF has a mandate which specifies what types of assets the fund can invest in. For example, some ETFs are designed to track a particular index, such as the S&P/ASX 200 Index (ASX: XJO). In this case, the fund will invest in all the companies that comprise the ASX 200 index, weighted according to their market capitalisation.

The fund manager will adjust the portfolio frequently to ensure it mirrors the makeup of their chosen benchmark index. 

This means it should offer investors a similar return to what they would earn if they bought all the shares on the index – only with much lower transaction costs.

It's not cost-free, though – ETFs do charge management fees. And it pays to shop around, as some funds are more costly than others.

These fees will reduce the return on your investment, so always be aware of how much your fund charges. But even the most expensive funds won't charge anywhere close to the brokerage you would have to pay if you were managing the portfolio on your own (not to mention all the time you would have to devote to it!). 

Some ETFs invest in specific types of shares or assets – like value shares, high-dividend shares, or even other assets like bonds, commodities or cryptocurrencies. Some ETFs invest in particular sectors of the economy, like tech, healthcare, and – you guessed it – renewable energy.

Renewable energy investing and ethical investing

Many ETFs adhere to ethical investing frameworks. This means they will screen companies to ensure they meet specific criteria, often based on the company's environmental, social and governance policies. If a company isn't up to scratch or involved in industries the fund considers unethical (like tobacco or gambling), it can't invest in them.

This means these types of ETFs will frequently invest in renewable energy companies but likely won't invest solely in them. For example, the Vanguard Ethically Conscious International Shares Index ETF (ASX: VESG) has holdings in renewable energy companies like New Zealand-based Infratil Ltd and Canadian hydropower company Hydro One Ltd.

However, these investments comprise only a tiny fraction of the fund's total portfolio of around 1,600 global companies. Its largest investment is in Apple Inc (NASDAQ: AAPL) – not the first brand most people would think of regarding renewable energy.

Pureplay renewable energy companies are those involved in producing and supplying green energy. They might specialise in certain types of energy creation, like solar or wind, or they might build and develop the tech and infrastructure required to support the renewable energy sector, like batteries and wind turbines.

What about international funds?

Many ETFs that trade on the ASX invest in international shares, which can expose you to markets in other countries. For instance, the Vanguard fund only invests in international shares.

Investing overseas has never been easier, with direct access to international ETFs. Many new digital brokers, like Stake, charge relatively low transaction fees to trade on overseas stock exchanges, especially the US markets.

This massively increases your options when it comes to ETF investing. Thousands of ETFs are listed on the New York stock exchange at any one time, many of which expose you to shares and other asset classes you just can't get back home on the ASX.

This also means more options for renewable energy investors. The First Trust NASDAQ Clean Edge Green Energy Index Fund (NASDAQ: QCLN) invests only in renewable energy companies listed on major US exchanges. And the Invesco Solar ETF (NYSEMKT: TAN) invests specifically in global solar energy companies.

Investing overseas can come with more risk – for starters, there are movements in foreign currencies to factor in. But more choice is still great because it ultimately means you can build a portfolio that more closely aligns with your investing goals, strategy, and even your personal beliefs.

Top renewable energy ETFs

ETFs are usually grouped under the financials sector on the ASX because they are really more of a financial product than a traditional company.

And, even more strangely, renewable energy companies aren't included in the energy sector (this covers oil and gas companies). Instead, green energy providers are included in the utilities sector, along with power generators and water providers.

The ASX doesn't have anywhere near as many renewable energy ETFs as markets in the United States do. However, a few homegrown ETFs offer different green energy options.

VanEck Global Clean Energy ETF

The oldest renewable energy ETF on the ASX, having launched all the way back in March 2021. The fund invests in a diversified portfolio comprising some of the largest renewable energy technology stocks globally.

It aims to replicate the performance of the S&P Global Clean Energy Select Index, which comprises the world's 30 biggest clean energy companies. It charges a management fee of 0.65% per annum, meaning you'd pay $6.50 in fees each year for every $1,000 invested.

The fund's largest holdings are in American residential solar energy company Sunrun Inc (NASDAQ: RUN) and Japanese electricity provider Chubu Electric Power Co Inc (TYO: 9502).

Betashares Climate Change Innovation ETF

This ETF offering might be suitable if you want a more diversified portfolio. It aims to track the performance of the Solactive Climate Change and Environmental Opportunities Index, which is made up of 100 global companies that are expected to have a positive impact on the climate.

In addition to pureplay renewable energy stocks, the Betashares ETF invests in green transportation companies, manufacturers of sustainable products, and wastewater management, among others. Like the VanEck ETF, it also charges 0.65% per annum in management fees.

Its largest holdings are in leading American electric car company Tesla Inc (NASDAQ: TSLA) and Chinese conglomerate BYD Co Ltd, which builds electric vehicles (including buses and forklifts), solar panels and rechargeable batteries.

Global X Battery Tech and Lithium ETF

Perhaps not strictly speaking a renewable energy ETF, the Global X ETF invests in companies along the global lithium battery value chain. This includes companies that mine and produce lithium, a key ingredient in the rechargeable batteries that power electric vehicles.

Electric cars produce no carbon emissions and can massively reduce air pollution in major cities. This can also help the environment and reduce the negative impacts of climate change.

Fees on this ETF are slightly higher than Betashares and VanEck at 0.69% per annum. It aims to track the Solactive Battery Value-Chain Index, comprising 29 lithium battery and electric vehicle stocks.

Its largest holdings are currently in German luxury car company BMW Group, which has been increasing production of electric vehicles, and Israeli solar energy company SolarEdge Technologies.  

How to invest in ETFs in Australia

The great thing about ETFs is that they are simple to buy and sell. To trade any shares of ETFs, you'll first need to set up an account with a broker (if you don't have one already). The major Aussie banks all offer brokerage services, and there are now many digital trading platforms available, some of which offer low transaction costs.

Once you set up your account, you can buy and sell units in an ETF the same way as ordinary shares. Simply lodge your trade with your broker, and you're done.

ETFs trade on the market like ordinary shares, which means they can be impacted by market volatility. Because the ETF unit price often fluctuates, you may wish to use a limit order to be sure of the price you'll be paying for your investment.

Pros of investing in renewable energy ETFs

There are several positives to investing in renewable energy ETFs. We have included some benefits below, but this list is not exhaustive.

It's a growing industry: Many climate scientists believe the planet is quickly running out of time if we want to avoid the worst impacts of climate change. This requires the mass (and fast!) adoption of renewable energy sources to drastically reduce the amount of fossil fuels we burn each year.

While the urgent need for climate action is alarming, it means the renewable energy sector will be exciting to watch over the next few years. Governments worldwide are investing in the green energy transition, and many banks are increasing their lending to the renewable energy sector.

This type of business environment promotes rapid growth and innovation and could result in the renewable energy industry quickly expanding over the next few years.

It can make you feel good about where your money is going: Sometimes, it's just nice to know you're investing in a good cause. Renewable energy companies are literally trying to save the planet, after all. It's hard to imagine a better reason than that!

Moreover, investors are becoming more aware of the ethics of the companies they invest in. Many investors only wish to own shares in companies that participate in socially beneficial industries and have robust ethical frameworks.

This means that companies in 'ethical' industries that positively impact society  – like renewable energy – might see more investor capital flow their way.

ETFs offer cheap diversification: ETFs also offer benefits. Investing in an ETF exposes you to an entire portfolio of shares in a single trade. This cuts down your transaction costs while also reducing your risk. This is because when you buy units in an ETF, you spread your investment over a range of companies or even an entire market index.

This means that by investing in a renewable energy ETF you are often gaining industry-wide exposure to green energy. Depending on the ETF, you may even be adding some international exposure to your portfolio.

And the cons?

Despite the many benefits, there are also some drawbacks to investing in renewable energy ETFs. These include:

Possible high risk: Most green energy companies are far smaller than their more established fossil fuel rivals. This gives them plenty of room to grow, which is great for long-term investors but also comes with much higher risk.

When smaller companies are forced to battle prominent, more entrenched rivals for market share, they are much more likely to fail. Enormous oil and gas companies have a loyal customer base, can more easily compete on price, and have plenty of cash to grow their business and squash smaller competitors.

This means that not all renewable energy companies will survive. In fact, many will probably go broke. But by investing in a diversified ETF, you give yourself a greater chance of holding shares in a few companies that do go on to succeed.

Technology may become obsolete: In many ways, the renewable energy sector is still in its infancy, and many companies in the industry remain unproven.

For the most part, green energy cannot yet compete on price with fossil fuels. And renewable energy technology may go through many iterations before it becomes truly economically viable.

This is part of what makes renewable energy such an exciting sector to be exposed to. But it also means that technology can quickly become outdated as new advances are made. There is the possibility that today's industry leaders may fall by the wayside in a few years.

Are ASX renewable energy ETFs a good investment?

As with any type of share or asset class, whether or not renewable energy ETFs are a 'good' investment will ultimately come down to your personal risk tolerance and investing goals – and probably even your own ethical views.

We have discussed the many benefits of investing in renewable energy ETFs. They may be one of the great growth stories of the next decade!

But they also come with plenty of risks, just like any other growth stock. So, consider whether investing in renewable energy ETFs aligns with your risk tolerance. And, if in doubt, seek help from a financial professional.