Go green with exchange-traded funds (ETF)

Today’s investors have access to more and more green exchange-traded funds (ETFs), which enables them to incorporate environmental protection strategies into their investment decisions. ETFs are investment funds traded on stock exchanges. Investors have a variety of ETFs to choose from, from ETFs that track major market indexes to ETFs that track a basket of foreign currencies.

Another type of ETF is the green ETF, which focuses on companies that support or directly participate in environmentally responsible technologies, such as the development of alternative energy sources or the manufacture of green technology equipment and devices.

Key points

  • Green ETFs only invest in companies that promote social and environmentally conscious policies and business practices.
  • These ETFs enable investors to obtain a diversified portfolio of company investments, thereby making green investment easier.
  • Examples of environmentally supported companies found in green ETFs include those engaged in promoting green transportation, alternative energy and sustainable living.

What is green investment?

Green investment, whether related to ETFs, mutual funds, or individual stocks, refers to the investment activities of companies that focus on their business to support or promote conservation efforts, alternative energy, clean air and water projects, and other environmentally responsible business decisions.

Most green ETFs focus on companies that directly or indirectly participate in the research, development, production, and provision of alternative energy. The company may be a distributor of alternative energy sources or a manufacturer of parts and equipment needed to produce energy, such as photovoltaic cells needed to manufacture solar panels. Each ETF has its own criteria to determine the eligibility requirements for assets.

Notes on defining green

Many new companies can-after careful planning-go green from the start. However, established companies with established processes for years or decades must work extremely hard to transform their daily work into environmentally friendly practices. This may allow the company to step on one foot in the old-school, environmentally irresponsible group, and the other foot in the modern green movement. Car manufacturers are a good example: the same company that makes high-fuel SUVs may also be at the forefront of developing hybrid and electric vehicles.

So what makes a company or an ETF green? Currently, there are no strict regulations on which companies or investment vehicles are officially green. Many considerations are matters of opinion. For example, some people believe that nuclear energy is a clean and green energy option, while others believe that toxic waste makes it impossible to be responsible for the environment. Generally speaking, it is up to each investor to decide whether the investment tool meets their standards.

Green ETF

Although every investor must decide whether an investment is green, more and more ETFs are centered on companies that are actively engaged in research and development of alternative energy sources, namely a wide range of clean energy, wind, solar and nuclear energy.

A wide range of clean energy ETFs

A wide range of clean energy exchange-traded funds cover the fields of alternative energy, renewable energy and clean energy. ETFs based on a wide range of clean energy include:

  • Invesco WilderHill Clean Energy ETF (PBW): This fund is based on the WilderHill Clean Energy Index. The fund selects companies that focus on green and renewable energy and technology that promote the development of clean energy. The fund mainly focuses on holding small-cap companies and implementing growth strategy investment methods.
  • iShares Global Clean Energy Fund (ICLN): This fund allocates its holdings to alternative energy sources, including solar and wind energy, and companies involved in biomass, ethanol, and geothermal power generation. Its top-level departments are semiconductors and semiconductor equipment, with additional involvement in the utility sector.

Wind Power ETF

Wind energy converts wind energy into other forms of useful energy. Wind turbines are used to generate electricity, windmills produce mechanical power, and giant sails can be used to provide thrust for ships. The energy production of wind power has increased. As of 2019, more than 100 countries have a certain level of commercial wind power capacity.ETFs based on wind power include:

  • The First Trust Global Wind Energy ETF (FAN): This ETF is based on the ISE Global Wind Energy Index. Safety components must actively participate in certain aspects of the wind energy industry, such as the development of wind farms or the distribution of wind power. Many of the holdings in this ETF are non-US companies, so this ETF includes ADR, GDR, and EDR.

Solar ETF

Solar energy uses solar energy and converts it into electricity, directly using photovoltaic cells or indirectly using concentrated solar energy (CSP). Germany, China and Japan are world leaders in solar energy innovation.The price drivers of solar ETFs include oil prices (usually positively correlated), government subsidies and incentives, and technological development. Solar-based ETFs include:

  • Invesco Solar ETF (TAN): This ETF is based on an index (MAC Global Solar Index), which tracks companies involved in the production of solar equipment, manufacturing products or services, and companies that provide raw materials for use by solar equipment manufacturers.

Nuclear Energy ETF

The proportion of nuclear power in global electricity is growing rapidly. Despite historical setbacks, such as the Chernobyl and Three Mile Island incidents, utilities and miners have begun to concentrate resources on uranium and nuclear energy. Nuclear energy-based ETFs include:

  • Global X Uranium ETF (URA): This fund focuses on replicating the performance of the Solactive Global Uranium and Nuclear Components Total Return Index before fees and expenses. The focus of the fund is uranium mining, with a focus on Canadian companies and the use of demand for nuclear materials.

Bottom line

This article highlights only a few of the many green ETFs available to investors today. Others include:

  • Invesco Global Clean Energy Investment Portfolio (PBD)
  • Invesco Cleantech ETF (PZD)
  • VanEck Vectors Low Carbon Energy ETF (SMOG)
  • VanEck Vectors Environmental Services ETF (EVX)
  • VanEck Vectors Uranium + Nuclear Energy ETF (NLR)
  • First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN)

Interested investors can talk to qualified financial advisors to further study green ETFs.

Many green investments involve new and smaller companies, which usually equates to greater volatility and/or weak performance. In other words, with the development of these companies and the need for alternative energy to be further understood and regulated, green investment may become an increasingly stable platform for investors.

The exchange-traded funds in this article are only examples and do not represent any actual positions held by the author. This article aims to introduce readers to green ETFs and does not make any inferences or suggestions on specific investments.


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