The ALPS Clean Energy ETF (BATS:ACES) is a clever concept – a fund that is constituted of companies which are operating in the clean energy sector which is growing in importance as the world transitions from traditional energy sources. However, a good idea does not necessarily translate into a good investment, and at present, this ETF is a case in point.
Renewable energy sources such as solar and wind are starting to provide more energy in the U.S. than coal. Image provided by Digital Trends.
In 2019, renewable sources provided more energy than coal in the U.S. for the first time. This trend is set to continue going forward albeit not as rapidly as advocates may suggest. Nonetheless, the long-term benefit of an investment in the clean energy sector is clear, and this is the rationale for considering an offering such as the ALPS Clean Energy ETF.
Thirty-four companies comprise this ETF, all falling into various sectors within two groups – renewables and clean energy. The only constituent in the fund outside of these is cash equivalents, which makes up 0.20% of the fund. Within renewables and clean energy, however, there is exposure to a broad range of sectors. This diversity of exposure is what makes the ALPS Clean Energy ETF a compelling choice.
Renewables are represented as follows: biomass and biofuel (5.65%) are represented by Covanta Holding Corp. (CVA), Enviva Partners LP (EVA), Renewable Energy Group Inc. (REGI), and Xebec Adsorption, Inc. (OTCQX:XEBEF); hydro and geothermal (8.06%) are represented by Brookfield Renewable Partners (BEP), and Ormat Technologies, Inc. (ORA); solar (22.01%) is represented by Enphase Energy, Inc. (ENPH), First Solar, Inc. (FSLR), Sunnova Energy International, Inc. (NOVA), and SunPower, Inc. (SPWR); and wind (20.68%) is represented by American Superconductor Corp. (AMSC), Boralex, Inc. (OTCPK:BRLXF), Clearway Energy, Inc. (CWEN), Innergex Renewable Energy, Inc. (OTCPK:INGXF), NextEra Energy Partners LP (NEP), Northland Power, Inc. (OTCPK:NPIFF), TPI Composites, Inc. (TPIC), and TransAlta Renewables, Inc. (OTC:TRSWF).
Clean energy is represented as follows: efficiency, LED lights and smart grid (23.49%) are represented by Acuity Brands, Inc. (AYI), Ameresco, Inc. (AMRC), CleanSpark, Inc. (OTC:CLSK), Cree, Inc. (CREE), Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI), Itron, Inc. (ITRI), Orion Energy Systems, Inc. (OESX), Universal Display Corp. (OLED), and Willdan Group, Inc. (WLDN); electric vehicles and energy storage (8.41%) are represented by Blink Charging Co. (BLNK), Arcimoto, Inc. (FUV), Tesla, Inc. (TSLA), and Workhorse Group, Inc. (WKHS); and fuel cells (11.50%) are represented by Ballard Power Systems, Inc. (BLDP), and Plug Power, Inc. (PLUG).
The ALPS Clean Energy is less diverse when it comes to geography – of the 34 companies in the index, only seven are not U.S. companies. Furthermore, all seven non-U.S. companies are Canadian companies. So while the ETF is well-diversified in relation to economic sector, geographically it is confined to North America. This means that the environmental policy adopted by these countries will affect the prospects of the constituent companies in this ETF – and in turn, the profitability of the ETF itself.
The ETF received a huge shot in the arm in early November, with the outcome of the U.S. presidential election. President-elect Joe Biden has committed himself to making the U.S. power grid free of greenhouse gases within 15 years, and eventually make the grid emission free by 2050. Small wonder that the share price for the ALPS Clean Energy ETF has shot up considerably in that time frame.
Shares for the ALPS Clean Energy ETF have gone up considerably since early November. Chart generated from TradingView.
Biden’s electoral victory is not the only reason why the stock has appreciated in price. Many institutional investors have moved in here, taking big stakes in the second and third quarters of the current financial year. This, too, has bid the share price up.
|Institutional Investor||Stake ($)||2020 Quarter|
|Captrust Financial Advisors||52,000||Q2|
|Glenmede Trust Co. NA||37,000||Q2|
|Raymond James Financial Advisors, Inc.||343,000||Q3|
|Stelac Advisory Services LLC||150,000||Q3|
|UBS Group AG||235,000||Q2|
Over the course of the year, then, the current share price has risen 195% from its 52-week low of $23.15. Even taking into account the impact COVID-19 had on the market in March – when the 52-week low was hit – the stock is currently trading higher than it was pre-pandemic and higher than it has since it hit the market in 2018.
The valuation is off-putting, to say the least. At this price in the high-$60 range, its quarterly distributions yield only 0.95%. Combine that with an expense ratio of 0.65% – higher than the 0.44% average – and you are looking at an ETF that is not likely to generate decent total returns if you start a position now.
In summary, the trend towards clean energy solutions will make investments such as the ALPS Clean Energy ETF ones to consider in future, and if you bought this at an earlier stage, it is worth holding. But given the puny dividend yield and higher-than-average expense ratio, I would advise waiting for a pullback before considering parking money here. When the initial political euphoria dies down, such a pullback may be forthcoming.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.