3 Green ETFs With Promising Upside And Long-Term Potential

Following several challenging years in the clean energy sector, as rising interest rates coupled with supply chain disruptions, and higher inflation led to an overall decrease in performance for clean energy and low-carbon-focused exchange-traded funds (ETFs), recent indicators showed that conditions are steadily improving again.

For starters, inflation seems to be falling faster than expected, with the U.S. Consumer Price Index (CPI), a key measurement for the average change in cost for a basket of commonly purchased goods and services, declining by 0.1% in May. Annual inflation slowed, falling from 3.3% in April to 3% in May.

With inflation under control, and moving towards the Federal Reserve’s 2% target range, the market anticipates the possibility of near-term rate cuts. More than this, the recent market correction on August 5 could be the push the Feds need to bring down interest rates within the coming months.

Market volatility has been through the roof in recent weeks. The benchmark S&P 500 dropped 3% on August 5, following news of rising unemployment and weaker jobs data. In July, employers added 114,000 jobs versus the expected 179,000. Unemployment rose to a two-year high of 4.3%.

The Nasdaq Composite was down 3.4% due to market volatility and major tech companies reporting softer earnings. Meanwhile, the Dow Jones Industrial Average dropped over 1,000 points, nearly 3% in one day.

With the market narrowingly missing a recession, traders anticipate that recent events could spur near-term interest rate cuts, helping to bolster market confidence and avoid a possible hard landing. For the clean energy sector, this could be good news, as lower interest rates could bring more investors back to the industry, and allow low-carbon stocks to respond to a market shift.

Return Of Green Investments

In May, it was reported by the news agency Reuters, that clean energy generation and distribution ETFs are outperforming oil and gas exploration investments. With clean energy companies gaining momentum on the back of improved macroeconomic conditions, those investment vehicles tied to green companies are seeing newfound growth.

More than this, the benchmark S&P Global Clean Energy Index has delivered a positive 1.15% quarter-to-date return, as of August 7, 2024. Comparatively, the Dow Jones U.S. Oil & Gas Index has delivered a -4.73% return during the same reporting period.

Similarly, on the long-term 10-year scale, the Clean Energy Index has delivered a modest 1.90% return, while the Dow Jones U.S. Oil & Gas Index delivered a negative 1.08% return.

Though direct investment in renewable services is somewhat smaller, research showed that the global economy added over 50% of renewable energy sources in 2023.

In fact, as per recent research by a VPN provider, these renewable energy advancements are not just a win for sustainability but also enhance the resilience and security of digital infrastructures globally, further emphasizing the importance of green investments today. This has been a growing trend across the world, as developed economies are introducing green policies that benefit both consumers and business owners.

Though, it’s worth mentioning that since 2022, clean energy and low-carbon ETFs have lost between 20% and 70% of their value. As inflation rose and interest rates kept climbing, capital availability became scarce, leaving many companies to take a backseat, while traders flooded their portfolios with tech and finance stocks.

While progress has been slow, the modest return of the clean energy sector could help bolster investor sentiment further as macroeconomic conditions begin to stabilize. There has been a shift in global financial markets in recent years. Over $4.7 trillion have been invested in green bonds, according to the Climate Bonds Initiative.

Green bonds are a financial instrument that is used to raise capital for future environmental and low-carbon-focused projects. Quarterly results showed that in Q1 2024, green bond volumes rose 15%, adding $272.7 billion compared to $237.2 billion recorded in Q1 2023, and an improvement of 41% since Q4 2023.

Green ETFs With Promising Long-Term Potential

As investment vehicles dedicated to planet-friendly projects begin to make a return to investors' portfolios, an emphasis on diversification can help traders minimize risks while remaining buoyant against current market volatility.

iShares Climate Conscious & Transition MSCI USA ETF

One of the key objectives of the iShare Climate Conscious & Transition MSCI USA (USCL)fund is to track the performance and investment results of large and mid-cap U.S. companies that are actively contributing to the low-carbon economy transition.

iShares applies a determined Index Provider, which tracks the current state of emissions intensity, emissions reduction targets, green business revenue, and potential climate risk management of all companies within the fund.

Given that the fund has been around for about 14 months, recent performance indicates that strategic deployment has helped to deliver positive returns. Overall, the fund has delivered a one-year return of 23.10%, slightly below the benchmark of 23.16%.

Since the turn of the year, the fund has delivered a 10.47% return, keeping on track with previous performance. Tracking the performance of companies across all sectors allows the fund to be widely diversified, while weighted mostly towards Information Technology (27.70%), Healthcare (13.33%), Financials (12.89%), and Communication (11.19%), and Consumer Discretionary (10.78%), among other industries.

NVIDIA (NASDAQ: NVDA), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Meta Platforms (NASDAQ: META), make up the top five holding positions, while others such as Eli Lilly (NYSE: LLY) and JPMorgan Chase (NYSE: JPM) help to diversify the top holdings.

Though for traders the iShares Climate Conscious & Transition MSCI USA ETF might be presented more as a tech-focused fund, the longer-term outlook for the fund is to invest in companies that will actively contribute towards the low-carbon economy transition.

JPMorgan Carbon Transition U.S. Equity ETF

The Carbon Transition U.S. Equity ETF (JCTR)provides investors exposure to the broader U.S. market by positioning the fund to benefit from companies that invest in the low-carbon economy transition.

Part of the fund’s objective is to primarily invest in large and mid-cap U.S. equity securities, allowing the fund to seek investments that can closely correspond to the JPMAM Carbon Transition U.S. Equity Index.

Quarterly performance shows that the fund has managed to closely mirror the performance of the corresponding index. The fund delivered one-year quarterly returns of 24.40%, similar to that of the JPMAM Carbon Transition U.S. Equity Index.

On the three-year scale, the fund delivered a 9.91% quarterly return, slightly below the corresponding index of 10.02% for the same recorded period.

In total, the fund has over 414 holdings, with the largest percentage of the fund invested in the Technology sector (36.3%). Other important sectors in the top holding position include Consumer Discretionary (14%), Industrial (12%), Healthcare (11.2%) and Financial Services (9.9%).

Aside from technology and finance stock making up the top 10% fund allocations, other notable investments include renewable energy company First Solar (NASDAQ: FSLR) and the environmental and industrial services provider Clean Harbors (NYSE: CLH).

Xtrackers Net Zero Pathway Paris Aligned US Equity ETF

The last exchange-traded fund that could hold long-term potential is the Xtrackers Net Zero Pathway Paris Aligned US Equity ETF (USNZ), which seeks to track the performance of the Solactive ISS ESG U.S. Net Zero Pathway Enhanced Index.

With the Solactive ISS as an underlying index, this fund delivers a benchmark that seeks to invest in companies with high-quality environmental policies and that have aligned their practices with the long-term global warming target of the Paris Climate Agreement.

With only a select handful of companies to invest in, the Xtrackers Net Zero Pathway fund provides investors with necessary exposure to individual equities that operate transparent and environmentally responsible business practices.

Since its inception in 2022, the fund has delivered an average return of 20.38%, slightly below the benchmark of 20.48% and above the S&P 500 return of 20.14%. The current one-year return is 24.44% versus 24.54% of the underlying index, and 24.56% of the S&P.

Top industry holdings include Information Technology (42.25%), with Healthcare (16.33%) and Communication Services (10.35%) making up the largest fund allocations. Other notable industries include Consumer Staples (4.61%), Real Estate (4.16), and Industrials (4.22%).

Another interesting characteristic of this fund is that it can provide investors with exposure to international markets, with a modest 0.48% of the fund dedicated to foreign equities. On a country basis, the fund is largely invested in U.S-based large and mid-cap companies, with only a small portion being invested in European equities.

Though large portions of fund allocations are distributed towards the technology and healthcare sector, overall this ETF works to track the performance of an underlying index that combines the importance of carbon-neutral achievements, along with cleaner and more environmentally efficient business practices.

Finishing Thoughts

Though there are continuous challenges for the broader clean energy and low-carbon economy sector, these problems are not isolated, but rather a shared experience across the market.

As the Federal Reserve begins to unwind its monetary policy, and with uncertainty looming ahead, the market might be in a position for a hard landing, leaving investors to park their capital in more buoyant investments that can withstand the impact.

With market dynamics changing, and a broader shift starting to take place, perhaps this could be a moment that would help pivot the low-carbon sector into the next market revolution alongside big players such as technology, healthcare, and finance.