Considering its youth relative to other industries, clean energy has developed a reputation for being politically sensitive. Various exchange traded funds providing access to renewable energy equities prove as much.
Consider the performances of funds like the ALPS Clean Energy ETF (ACES ) in the leadups to the 2020 and 2024 presidential elections. ACES and friends rallied in the back half of 2020, with each poll showing an advantage for then-former Vice President Joe Biden over President Trump. The opposite was true last year, as clean energy stocks slipped as investors priced in a second Trump term. That slide extended into this year.
Still, some industry experts and market observers, while acknowledging Trump isn’t a clean energy fan, believe the industry’s fundamentals remain sturdy. That could portend opportunity in the space.
Examining Clean Energy Headwinds, Catalysts
One of the primary reasons renewable energy stocks have disappointed for three years is the Federal Reserve’s rate-tightening campaign that started in 2022. Companies in the space, including ACES holdings, are capital-intensive and that borrowing costs rise, their cost of capital does the same. On the other hand, ACES components could benefit if rates decline. But that proposition is up in the air for now.
Another factor that’s challenging renewable energy stocks — and one that clearly results from politics — is tariffs. The U.S./China trade war is a drag on clean energy firms. That’s because China is a major supplier of the components needed to produce solar panels and other products manufactured by ACES member firms. When it comes to investing in renewable energy stocks or ETFs like ACES, tariffs aren’t the only political issue to weight.
“Investor sentiment toward clean energy shifted notably after Trump’s election, with capital pulling out of the sector over concerns about regulatory changes,” noted Morningstar analyst Valerio Baselli. “There’s also uncertainty around the future of clean energy tax credits under the Inflation Reduction Act, a piece of legislation enacted by the previous Joe Biden administration.”
Potential Job-Creating Benefits
Talk about Trump potentially unwinding the Inflation Reduction Act illustrates an important point for ACES investors to consider. First, the president is unlikely to unravel the Act in wholesale fashion. Second, there’s data suggesting the legislation has had job-creating benefits for districts the president carried and some areas that are historically homes to tight congressional races. That implies it could be politically risky to touch the Act over the near term.
Regarding other fundamental factors, some ACES holdings are deeply inexpensive. And some are improving free cash flow.
“Free cash flow yields are in double [digits. And] companies are starting to return capital to shareholders. And valuations are back to 2019 levels,” concluded Baselli.
For more news, information, and analysis, visit the ETF Building Blocks Channel.
