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An Energetic Approach to Next Generation Energy Investing

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Gone are the days when investing in energy stocks meant focusing on fossil fuels companies, such as coal and oil producers. In recent years, the movement toward renewables and sustainable energy sources spurred the creation of the alternative or clean energy investment theme.

Said another way, the energy sector is evolving. The corresponding investments should be doing the same. Clean energy extends beyond renewable energy sources, extending to products, technologies and themes that are driving output and consumption of the next generation of energy sources.

In many ways, the clean energy space is evolving on par with the technology sector while delivering new investment opportunities as is the case in the technology universe. Earlier this century, Wall Street did not pay much attention to themes such as cloud computing, cybersecurity, fintech and robotics. Today, those concepts and more are mainstream when discussing the technology opportunity set.

The next generation of energy investing includes familiar concepts, such as solar and wind, as well as fast-growing themes, such as electric vehicles and storage and light-Emitting-Diode (LED) and Smart Grid.

Sun Shines For Solar

Among clean energy concepts, solar is one of the most seasoned. As is often the case with new concepts and technologies, it took solar energy awhile to gain mainstream traction. Today, solar is one of the leading concepts in the disruptive energy space with data pointing to continued adoption.

“Annual solar installations grew almost 20 percent year over year in 2017, and the solar industry is also edging within 100 gigawatts, a milestone the industry will reach this year,”1 according to IHS Markit.

Importantly, solar energy is not a concept confined to the U.S. With scores of major economies, such as China and India, looking to reduce their carbon footprints, increased solar adoption is expected to be widespread around the world. Twenty countries are expected to top 500 megawatts in annual solar installations.

“The number of significant solar photovoltaic markets has been growing steadily over the past 10 years, alongside an increasing volume of installations in new markets,” said Markit. “Ultimately, how solar demand in 2018 unfolds will hinge on global module prices, steered by events in the top three markets, as well as by local policies and developer activity.”

As the chart below confirms, China is leading the way when it comes to new solar installations.

The Next Automotive Revolution

One of the newer growth frontiers in clean energy investing is the electrical vehicle theme. In the U.S., many investors are familiar with Elon Musk’s Tesla Inc. (NASDAQ: TSLA) and while Tesla certainly has brand recognition, the electric vehicle theme reaches far beyond a single company.

As was the case with solar, declining costs and improving production efficiencies are among the factors that will drive increased use of electric vehicles.

“Our latest forecast shows sales of electric vehicles (EVs) increasing from a record 1.1 million worldwide in 2017, to 11 million in 2025 and then surging to 30 million in 2030 as they become cheaper to make than internal combustion engine (ICE) cars,” according to BloombergNEF. “China will lead this transition, with sales there accounting for almost 50% of the global EV market in 2025.”2

Related: The Trend is Your Friend in This Momentum ETF

Other data points confirm China’s leadership role in the electric vehicle revolution. In China in 2017, just 2.3% of the 30 million automobiles produced were electric vehicles, but JPMorgan believes that number could surge to 12% by 2025.3

Bringing It Together

Typically, index and exchange traded funds (ETFs) that offer exposure to clean energy investments focus on a specific theme, be it electric vehicles, solar, wind, etc. The ALPS Clean Energy ETF (ACES) offers broad-based exposure to companies focused on renewables and other clean technologies spread across seven disruptive clean energy themes.

1 Source: IHS Markit March 29, 2018 http://news.ihsmarkit.com/press-release/technology/ihs-markit-white-paper-identifies-eight-global-solar-and-energy-storage-mar
2 Source: Bloomberg New Energy Finance https://about.bnef.com/electric-vehicle-outlook/
3 Source: South China Morning Post June 30, 2018 https://www.scmp.com/business/companies/article/2153154/cobalt-lithium-and-nickel-are-booming-due-chinas-insatiable
Important Disclosure & Definitions
Investors should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information. For a prospectus for the above listed funds, please click here. Please read the prospectus carefully before investing. For additional information on the above listed funds, please click the respective link.
Standardized performance for the ALPS Clean Energy ETF (ACES) can be found here. Current holdings for ACES can be found here.
Shares are not individually redeemable and the owners of shares may purchase or redeem shares from a fund in creation units (blocks of 50,000 shares) only.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of ALPS Advisors, Inc. In addition, ALPS Advisors, Inc. assumes no responsibility to ensure the accuracy of the content written by the author.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus.
An investment in the Fund is subject to investment risk including the possible loss of the entire principal amount that you invest.
Clean Energy Sector Risk. Obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants and general economic conditions can significantly affect companies in the clean energy sector. In addition, intense competition and legislation resulting in more strict government regulations and enforcement policies and specific expenditures for cleanup efforts can significantly affect this sector. Risks associated with hazardous materials, fluctuations in energy prices and supply and demand of alternative energy fuels, energy conservation, the success of exploration projects and tax and other government regulations can significantly affect companies in the clean energy sector. Also, supply and demand for specific products or services, the supply and demand for oil and gas, the price of oil and gas, production spending, government regulation, world events and economic conditions may affect this sector. Currently, certain valuation methods used to value companies involved in the clean energy sector, particularly those companies that have not yet traded publicly, have not been in widespread use for a significant period of time. As a result, the use of these valuation methods may serve to increase further the volatility of certain clean energy company share prices.
Concentration Risk. The fund seeks to track the underlying index, which itself may have concentration in certain regions, economies, countries, markets, industries or sectors. Underperformance or increased risk in such concentrated areas may result in underperformance or increased risk in the fund.
Canadian Investment Risk. The fund may be subject to risks relating to its investment in Canadian securities. The Canadian economy may be significantly affected by the U.S. economy, given that the United States is Canada’s largest trading partner and foreign investor. Any negative changes in commodity markets could have a great impact on the Canadian economy. Because the fund will invest in securities denominated in foreign currencies and the income received by the fund will generally be in foreign currency, changes in currency exchange rates may negatively impact the fund’s return.
Micro-Capitalization Company Risk. Micro-cap stocks involve substantially greater risks of loss and price fluctuations because their earnings and revenues tend to be less predictable (and some companies may be experiencing significant losses), and their share prices tend to be more volatile. The shares of micro-cap companies tend to trade less frequently than those of larger, more established companies, which can adversely affect the pricing of these securities and the future ability to sell these securities.
Small- and Mid-Capitalization Company Risk. Smaller and mid-size companies often have narrower markets, less liquidity, more limited managerial and financial resources and a less diversified product offering than larger, more established companies. As a result, their performance can be more volatile, which may increase the volatility of the Fund’s portfolio.
Large Capitalization Company Risk. The large capitalization companies in which the Fund invests may underperform other segments of the equity market or the equity market as a whole.
NACEX Index – The CIBC Atlas Clean Energy Index is an adjusted market cap weighted index designed to provide exposure to a diverse set of U.S. or Canadian based companies involved in the clean energy sector including renewables and clean technology.
One cannot invest directly in an index.
The fund is new and has limited operating history.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Clean Energy ETF.
CLN000111 12/31/2018
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