The Money For The Rest Of Us podcast recently discussed a really interesting topic entitled: Should You Invest In Renewable Energy ETFs?
ETF’s, for those who don’t know what they are, stands for Exchange Traded Funds and is a market security that tracks an index of bonds, commodities or equities.
Renewable Energy ETF’s track a basket of equities in the renewable energy sector. So for example, publicly traded solar power companies and wind generation companies may be included in an ETF. Some of the most popular Renewable Energy or Alternative Energy ETF’s are the Guggenheim Solar ETF, the iShares Global Clean Energy ETF and the PowerShares Global Clean Energy Portfolio ETF.
Investor’s can buy Renewable Energy ETF’s on trading platforms like Hargreaves Lansdowne, or via CFD Trading.
The question on the podcast was posed by an investor in the UK – he was bullish on renewables for the simple reason that he sees growth in the sector as inevitable. But he was concerned as the sector indices tracking renewables seemed to have performed poorly over the last decade.
The podcaster on the Money For The Rest Of US spent some time explaining how solar’s share of global energy capacity (not to be confused with production – which is dependent on the sun shining) has grown. Data from the International Energy Agency shows that solar capacity has grown from 3% in 2014 to over 12% today, and is predicted to reach 18% by 2022. This contrasts to solar energy production which was 0.7% in 2014 and is expected to reach 3.6% by 2022.
The podcaster also explained how the price of solar panel production had plummeted from $3.50 per watt of power in 2005 to close to 50 cents today!
One would think that all of these changes bode well for investors in renewable energy, but as the podcaster points out “what matters is not how fast an economic sector is growing but how fast it is growing relative to investor expectations”. And this is the reason why investors have seen poor returns as Renewable Energy companies have consistently fallen short of expectations.
For example, the Guggenheim Solar ETF mentioned above has returned -24% annualized from 2008-2016.
In short, the renewable energy sector has been plagued by high investor expectations. As the podcaster points out, the average 5-year annualized return for the top 8 renewable or alternative energy ETFs is -4.8% for the period ending 30 June 2016. That compares unfavourably to the 12.1% annualized return for the S&P 500 Index, a measure of the 500 largest U.S. stocks, and 5.4% for the MSCI All Country World Index, a measure of global stocks.
Given the disappointing performance of the renewable and alternative energy sector over the past decade, the question is: Have investors expectations lowered and is now the time to invest in Renewable Energy?
One way to figure this out is to look at the price-to-earnings ratio for ETF’s. The PE ratio gives a measure of the price investors are willing to pay as a ration of expected earnings. For an ETF like the Guggenheim Solar ETF it’s current PE ratio is 7.3 compared to 20.0 for the MSCI All Country World Index. This should make one think that the security is undervalued and now is perhaps the right time to invest.
What do you think?