Capture the Entire Low Carbon Energy Opportunity SetSunny Bokhari, ETF Product AnalystApril 28, 2021
As the world transitions to a low carbon future backed by regulatory support and exciting developments in clean energy technologies, investors are presented a global opportunity to participate in the future growth of the low carbon energy ecosystem. The expansion of carbon credits in the United States, review of carbon taxes in the European Union and clean energy transition plans happening in China highlight the paradigm shift underway.1 The recently passed American Jobs Plan expanded federal tax credits for clean energy investment, production and electric vehicles.2 All of these regulatory initiatives serve as a tailwind for the industry.
One clear area of focus as governments, businesses and individuals attempt to address the impacts of climate change is energy production and consumption. Energy Information Agency estimates that electric power utilities and transportation account for a significant portion of all carbon emissions in the U.S.3
Fossil Fuels Account for Significant Portion of Emissions
Source: Energy Information Agency, Goldman Sachs Global Investment Research. Chart data as of 2019.4
What this Means for Your Portfolio
The low carbon energy ecosystem is far reaching and an investment in the entire opportunity set allows investors to participate in the growth of this important area of the market while avoiding overexposure to narrow sub-themes such as solar, hydrogen or fuel cells. While these sub-themes may produce very compelling returns, diversification may allow investors to participate while avoiding concentration in what can at times be lofty elevations of particular areas of the market. This broad, low carbon energy ecosystem includes allocation to electric vehicles,5 alternative energy producers and wholesalers, as well as low carbon energy supporting technologies. It is important to look under the hood of clean energy and low carbon portfolios to understand their true makeup. A balanced approach including established alternative power producers and wholesalers, along with emerging low carbon energy technologies, may provide the potential stability associated with utilities exposure that could help offset the volatility accompanying high growth, low carbon transition technologies.
For example, low carbon energy companies experienced market exuberance over the last year but have since pulled back from their market highs. Though the entire market experienced volatility, alternative energy producers and wholesalers fared better than emerging technologies in the space.
Ticker Company Name Weight* Sub-Theme Return Std. Dev Max Drawdown NEE NextEra Energy Inc. 8.3% Alternative Power Producers/Wholesalers 28.26 36.88 -18.19 ENEL Enel SpA 6.7% Alternative Power Producers/Wholesalers 49.39 34.69 -16.85 VWS Vestas Wind Systems A/S 5.8% Wind 156.68 51.61 -35.07 ORSTED Orsted A/S 4.2% Alternative Power Producers/Wholesalers 66.66 40.70 -34.91 PLUG Plug Power Inc. 1.9% Fuel Cell 912.43 127.44 -57.94 BE Bloom Energy Corp. 0.5% Fuel Cell 417.21 139.08 -45.13
*MVIS Global Low Carbon Energy Index weight as of 4/26/2021. Source: Morningstar, Time Period: 4/1/2020 to 3/31/2021 Past performance is not a guarantee of future results. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Fund holdings will vary. For a complete list of holdings in the ETF, please click here.
The following sub-themes are an important consideration for your low carbon, clean energy portfolio:
Renewable power sub-theme includes alternative energy producers directly involved in the generation, transmission and distribution of electricity from wind, solar, hydro, geothermal and renewable energy sources. Whereas alternative energy wholesalers include companies that purchase electricity generated from clean and renewable resources and resell to other companies, districts, etc. Often alternative energy producers also engage in wholesaling activities, hence the two are congruent to each other.
Electric Vehicles and Battery Technology
Electric vehicles (EVs) are battery-powered vehicles that do not rely on internal combustion engines powered by fossil fuels. EVs are seen as a low-hanging fruit to curb carbon emissions. The electric vehicle infrastructure primarily consists of automobile, battery and inverter manufacturers. Electric vehicle charging stations and wiring companies are also emerging technologies in this sub-theme.
The solar industry mainly consists of manufacturers that produce photovoltaic panels and installers that install these devices at residential and commercial facilities.
Wind power is currently America’s largest source of renewable energy and continues to grow as traditional utilities diversify their energy mix.6 Turbine manufacturers that build the generators, towers and blades to harvest wind dominate this sub-theme.
Hydrogen and Fuel Cell
Hydrogen is the simplest energy-dense element that, if burned for fuel only, produces water as its byproduct. A fuel cell combines hydrogen and oxygen to produce energy. The challenge has been in producing hydrogen fuel cells at scale. Falling costs of production along with government and corporate interest alike is supportive of this nascent technology.
Filtration includes products that reduce carbon emissions in industrial and consumer applications, such as innovative building insulation. The concern in curbing carbon emissions has brought prominence to companies manufacturing these products.
VanEck Vectors® Low Carbon Energy ETF (SMOG) allows investors to access the broad opportunity set in the low carbon energy ecosystem and provides global exposure to these clean energy sub-themes, from companies involved in renewable energy production and distribution to companies that provide key technologies to the entire supply chain.7
MVIS Global Low Carbon Energy Index Sub-Theme Exposure
Source: FactSet, MVIS as of 4/26/2021
MVIS Global Low Carbon Energy Index Country Exposure
Source: FactSet, MVIS as of 4/26/2021
As the transition to low carbon technology accelerates, we believe a holistic global investment approach that diversifies across countries, sectors and sub-themes is beneficial for investors looking to gain exposure to the low carbon ecosystem.
7See MVIS Global Low Carbon Energy Index (MVSMOGTR) disclosure.
On April 26, 2021 the fund changed it index from the Ardour Global IndexSM Extra Liquid (AGIXLT) to the MVIS Global Low Carbon Energy Index (MVSMOGTR)
MVIS Global Low Carbon Energy Index is the exclusive property of MV Index Solutions GmbH (a wholly owned subsidiary of the Adviser), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Low Carbon Energy ETF is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.
An investment in the Fund may be subject to risks which include, among others, investing in low carbon energy companies, investing in European issuers, foreign securities, foreign currency, depository receipts, utilities, consumer discretionary, industrials and information technology sectors, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, high portfolio turnover, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's return. Small- and medium-capitalization companies may be subject to elevated risks.
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Authored bySunny Bokhari
ETF Product Analyst