The clean energy sector has become one of the more compelling investment options for a number of reasons. Agree with it or don’t agree with it, the focus on global warming and green energy transition won’t go away. And there’s money to be made in that. That’s why the First Trust NASDAQ® Clean Edge® Green Energy Index Fund ETF (NASDAQ:QCLN) is worth a look. This fund provides investors with a diversified portfolio of the green energy industry’s main players. The fund does this by investing in a wide range of different companies that are at the forefront of the transition into clean energy.
QCLN is designed to track the performance of the NASDAQ® Clean Edge® Green Energy Index, which is made up of a broad range of companies on small-, mid-, and large-cap US stocks that are involved in clean energy sub-sectors. These sub-sectors range from advanced materials, energy intelligence, renewable electricity generation, renewable fuels, and energy storage and conversion.
A Look At The Holdings
The portfolio is evenly diversified among growth and value stocks. Having said that, it is concentrated, with the largest position, First Solar (FSLR), making up 13.41% of the fund.
So what are these companies? First Solar is a manufacturer of solar modules and provider of utility-scale photovoltaic (PV) power plants. Its thin-film PV modules are recognized internationally for their quality by the solar energy industry, making First Solar the world’s largest manufacturer of thin-film solar modules and third-largest manufacturer of PV modules overall. Enphase Energy, Inc (ENPH), on the other hand, designs, develops, and sells software-driven energy solutions for the home, including solar microinverters, battery storage, and energy management technology. What about ON Semiconductor? It’s a leading supplier of semiconductor components. As we can see from just the top 3 holdings here, it’s an interesting mix of companies that track the green energy theme.
Having said that – QCLN is top-heavy. The top 5 positions make up over 40% of the fund. Something to keep in mind when you think about overall risk mitigation.
Sector Composition and Weightings
QCLN is diversified among different sectors within clean energy.
Renewable Energy Equipment at the top include companies that make, design, distribute and install renewable energy technologies (e.g., solar photovoltaics, wind turbines, geothermal systems). As to Semiconductors, these companies in this industry provide power management solutions, microcontrollers and other semiconductors driving the scalability of clean energy technologies. And don’t forget about automobiles, which are increasingly shifting towards being electric and being drivers (pun intended) of battery technologies.
Peer Comparison
One fund worth comparing against is the ALPS Clean Energy ETF (ACES). This fund also invests in companies involved in the production, distribution and facilitation of clean energy around the world, but its focus is on US and Canadian companies. When we look at the price ratio of QCLN or ACES, we find that QCLN has done miles better, which suggests the composition of QCLN is significantly more momentum driven.
Pros and Cons
The positives here? The global shift away from fossil fuels and towards clean energy is a long-term secular force, driven by the environment movement, intelligent government regulation, and sustainable technology that seems poised to propel continuing growth in the clean energy sphere. QCLN provides broad industry exposure to this in a simple way.
The downside? Government policies, subsidies and regulations play significant roles in determining the commercial viability of clean energy businesses and activities. Any adjustment to these policies and rules may have an adverse, material impact on the profitability and growth prospects of these stocks. In addition, the clean energy sector more generally is prone to volatility, which means if you buy into the theme, be prepared for plenty of ups and downs.
Conclusion
I believe that the First Trust NASDAQ® Clean Edge® Green Energy Index Fund offers investors strong value. The fund provides broad-based and concentrated exposure to innovative companies in the alternative energy space that are poised to play a crucial role in modern energy solutions and domestic power generation in the U.S. and around the world. I think overall it’s constructed well, and worth considering.
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