In a bygone era of environmental, social, and governance (ESG) investing, utilities stocks and exchange traded funds certainly weren’t the first assets investors thought of.
Today, the script is being altered because some utilities are changing how they operate and, in the process, are becoming increasingly prominent players when it comes to the delivery of renewable energy. Owing to the fact that many ESG- and climate-dedicated ETFs are lightly allocated to the sector, funds such as the Utilities Select Sector SPDR Fund (XLU ) are worth examining as backdoor renewable energy investments.
Recent news that the Biden administration is pausing some solar tariffs could be a catalyst for solar-aligned utilities, according to some analysts.
“Two of our top picks, NextEra Energy (NEE) and NiSource (NI), were among those utilities whose stocks took the hardest hit because of the solar tariff fears. The management teams of both companies said they were postponing a portion of their large solar growth plans because of tariff-related supply concerns,” according to Morningstar.
XLU, which tracks the Utilities Select Sector Index, fits into this equation nicely because NextEra is by far the fund’s largest component at a weight of 15%. NiSource accounts for 1.17% of the XLU roster, and about a quarter of that company’s upcoming spending is expected to go toward renewable energy. Recent price action confirms that those XLU holdings are sensitive to solar news.
“NextEra’s stock fell as much as 16% in the three weeks after management said that it might delay as much as 2.8 gigawatts of a possible 15 GW solar project pipeline. It has since rebounded to near our $78 fair value estimate. We are reaffirming our 8% annual earnings growth outlook. NiSource’s stock fell 11% in late April even before management said $500 million of its planned solar investments could be delayed. It has since rebounded to near our $31 fair value estimate,” added Morningstar.
NextEra and NiSource aren’t the only utilities with solar exposure. AES (NYSE:AES) and Alliant Energy (NYSE:LNT) are among the other utilities boosting their solar profiles. Those are two of XLU’s 29 holdings, and they combine for about 3% of the fund’s weight.
Morningstar notes that there are some solar-related risks to consider. That’s where XLU’s low-volatility reputation could benefit investors.
“Solar panel tariffs remain a risk pending the outcome of the Commerce Department’s investigation into whether Chinese manufacturers sidestepped tariffs by shipping panels through tariff-free Asian countries. We expect an initial Commerce report this fall,” concluded the research firm.
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