Renewable energy equities and related ETFs struggled in the first quarter, extending a surprisingly lengthy span of underperformance by the once-hot group. Hope isn’t a viable investment strategy. But some market observers argue that clean energy fare could be primed for a rebound.
Such a scenario would benefit ETFs such as the ALPS Clean Energy ETF (ACES ). Iinvestors may find it difficult to nibble at funds like ACES over the near term. But the broader fundamental outlook for the clean energy industry remains attractive.
For example, natural gas remains the dominant energy source in the U.S. But data confirms the bulk of new energy installations in 2024 comprised battery storage, solar and wind. And those three industries combine for more than 41% of the ACES portfolio.
Fundamental Outlook Could Come Up ACES
Over the near term, timing a clean energy rally and the ideal time to enter ETFs such as ACES could remain challenging endeavors. What’s not up for debate are encouraging renewable energy adoption trends. And some of those are highly relevant to the ALPS ETF.
“Looking longer-term, we believe wind and solar will steadily rise to over 40% of generation over the next [decade. That’s] over double current generation levels. While renewables will account for a rising percentage of generation, we still see meaningful roles for legacy fuels—such as natural gas and nuclear—to help meet rising electricity demand,” noted Morningstar analyst Brett Castelli.
When it comes to a 2025 clean energy ETF/equity resurgence, there are no guarantees that scenario will play out. But there are potential tailwinds for funds such as ACES. For example, domestic solar build-out is expected to exceed the pace set in 2024.
Among the individual clean energy stocks Morningstar is most constructive on, Brookfield Renewable Partners L.P. (BEP) and First Solar (FSLR) — two ACES components — were highlighted. Castelli mentioned Brookfield’s diverse renewable energy portfolio and the company’s knack for smart acquisitions that bolster its renewables exposure. As for First Solar, there could be catalysts awaiting that name, too.
“The company’s module sales efforts have become increasingly focused on select end markets. The United States and India represent the vast majority of sales efforts, where policies leave the company in a more favorable competitive position. First Solar’s earnings are heavily reliant on domestic manufacturing credits, but we see its current valuation as already pricing in a downside scenario under which the credits are removed,” concluded Castelli.
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