Out of all the investment themes available for me to tap into, renewable energy stocks are one that I continue to believe will eventually yield better-than-average returns.
This confidence received another boost earlier this week.
Hot sector
A report issued on Wednesday by the climate and energy think tank Ember said clean energy sources generated 38% of the world’s electricity last year. Some 10% of global electricity came specifically from wind and solar. That’s double the percentage produced seven years ago when the Paris climate agreement was penned.
These are headline-grabbing numbers. What I found even more interesting was that the three ‘fastest switchers’ are in very different parts of the world: Australia, Vietnam and the Netherlands. For me, this is clear evidence that the push toward renewable energy sources is unquestionably global and will come to dominate production sooner than I had ever imagined.
Thankfully, I’ve already put some of my money where my mouth is.
How I’m investing
In the aftermath of the coronavirus crisis, I began building a position in the iShares Global Clean Energy ETF. As its name implies, this passive fund seeks to offer investors access to a group of companies that specialise in either producing clean energy or providing the means and equipment to do so.
Some computer-managed funds track thousands of company stocks. Here however, the portfolio is relatively concentrated with 76 holdings. Personally, I’m happy with this number. It’s large enough to mitigate some risk. Then again, it’s not so large as to completely dilute the gains made by what turn out to be the best performing members.
Knowing that my money is spread between developed and emerging markets adds another element of diversification. It also gives me exposure to many companies I would otherwise remain oblivious to. This is important as I don’t have the time (nor intellectual prowess) to become an expert in renewable energy stocks. As passive investing legend John Bogle recommended, I’ve elected to simply “buy the haystack” instead.
Risks to consider
Despite evidence that the move to cleaner sources of energy is gathering serious pace, the performance of this ETF has been volatile, to say the least. Having returned 140% in 2020, the fund then fell 24% in 2021. This pretty much wiped out the gains I’d accumulated since buying. The fact I’m paying a fee regardless of performance (0.65%) makes this even more frustrating. It also serves as a reminder that I could potentially lose money here as well as make it.
That said, my Foolish training reminds me of the need to be patient. The real spoils could come in the next couple of decades rather than the next couple of months. Knowing this, I’m embracing any price weakness right now.
Other options
Naturally, there are other options available to me should I decide to increase my exposure to renewable energy stocks. These include managed funds (which usually charge higher fees) as well as specific company stocks (which usually increase risk).
As things stand however, I’m happy with my single fund exposure to renewable energy stocks for now. When a theme as potentially huge as this comes along, I think it’s a good idea to climb on board and adapt as I go. This is far more preferable to never starting at all.