BYDDY - ACES: Investing In EVs Solar And Wind - But No Royal Flush

2023-03-17 12:46:03 ET

Summary

• The ALPS Clean Energy ETF is down 23% over the past year, but up 10.2% YTD. However, it's no Royal Flush, more like a pair of nines.
• However, since the fund was started in June of 2018, ACES has delivered an average annual return of 15.5%.
• Those gains have been achieved by investing in U.S. & Canadian pure-play clean energy companies.
• Current top holdings include First Solar, Brookfield Renewable Partners, Tesla, NextEra, lithium producer Albemarle Corporation, and Enphase Energy.

The portfolio of the ALPS Clean Energy ETF ( ACES ) is most heavily weighted to the EV, solar, and wind sub-sectors within the clean-green renewable energy sector. The fund has a 0.55% expense fee, which is relatively high. Today, I'll take a look at the top-10 holdings in the ACES ETF and compare its performance with other leading opportunities and options for clean-energy minded investors.

Investment Thesis

Global EV sales continued to boom last year, growing 55% yoy to 13% of the global new vehicle market:

Meantime this year - and like the previous two-years - renewable energy sources like solar, wind, and battery backup will continue to be the vast majority (82%) of new incremental electrical power generation capacity in the U.S. while more than half of that new U.S. electric power-gen capacity will be solar (a whopping 29.1 GW):

That being the case, the investment growth thesis supporting the EV, solar, wind and clean-green energy sector as a whole is both clear and compelling. With that as background, let's take a look to see how the ACES ETF has positioned investors to benefit from these fundamental drivers going forward.

Top-10 Holdings

The top-10 holdings in the ALPS Clean Energy ETF are shown below and were taken directly from the ACES ETF webpage where investors can find more detailed information on the fund:

The top-10 holdings equate to what I consider to be a moderately diversified 53% of the portfolio. Overall, the portfolio is most highly allocated toward the EV, Solar, and Wind sub-sectors:

The #1 holding with a 7.8% weight is First Solar ( FSLR ). FSLR shares are up nearly 160% over the past year as revenue is expected to grow to $3.49 billion in FY2023 (+33% yoy) while earnings are expected to swing from losses to profits of an estimated $0.86/share in Q1 FY23 . First Solar is a global provider of photovoltaic ("PV") solar energy systems and solutions and also engages in manufacturing solar PV technology for thin film semiconductor modules.

Tesla ( TSLA ) is the #3 holding with a 6.0% weight. Tesla stock has been on an arcade ride over the past year as CEO Elon Musk injected Twitter related drama onto Tesla shareholders as he sold multiple big blocks of Tesla stock to prop-up his Twitter acquisition. That over-shadowed what otherwise was another strong year of growth for TSLA - selling 1.31 million EVs for a 13% share of the global plug-in market. However, Tesla's market share dropped 1% yoy as BYD ( BYDDY ) picked up 9 percentage points of global market share and is now the #1 plug-in EV manufacturer with an 18.4% market share. Note that BYD is not a holding in the ACES ETF because it only invests in U.S. and Canadian companies. That's a shame, because BYD has outperformed TSLA by nearly 45% over the past year:

Renewables focused NextEra Energy Partners ( NEP ) is the #5 holding with a 5.0% weight. NEP is down 22% over the past year, yields 5.2%, and trades with an estimated forward P/E = 25.4x. The LP has a 5-year dividend CAGR of ~14.9% .

Leading lithium producer Albermarle Corp ( ALB ) is the #6 holding with a 4.9% weight. ALB is seeing strong demand from EV battery makers as revenue in FY23 is expected to grow to $11.43 billion, up from $7.32 billion last year (+56% yoy). ALB shares are +17.8% over the past year.

Plug Power ( PLUG ) is the #7 holding with a 4.8% weight. PLUG is investing to grow its business in clean hydrogen and zero-emissions fuel cell solutions for supply chain and logistics applications, on-road EVs, and the stationary power market. PLUG is working on building-out an end-to-end green hydrogen ecosystem - including dispensing infrastructure. The company is in a fast-growth mode: revenue is expected to rise 91% in FY23 to $1.34 billion:

Still, PLUG shares are down ~50% over the past year, likely because the company is still not turning a profit.

Rounding out the top-10 list is Enphase Energy ( ENPH ) with a 4.0% weight. ENPH specializes in semiconductor-based microinverters, which convert PV energy at the individual solar module level to usable energy levels. ENPH also offers proprietary networking & software technologies for energy monitoring, control, optimization, and efficiency. ENPH shares are +15% over the past year, and 4,288% over the past 5-years.

Performance

The graphic below compares the 3-year total returns of the ACES ETF with those of some of its peers, including the First Trust Clean/Green Energy ETF ( QCLN ), the iShares Global Clean Energy ETF ( ICLN ), and Invesco WilderHill Clean Energy ETF ( PBW ), and the First Trust Nasdaq Clean Edge Grid ETF ( GRID ):

As can be seen by the graphic, the ACES ETF is far from being a leader in the field. The QCLN ETF, which actually has a 3 basis points higher expense fee (0.58%) as compared to the ACES ETF, has more than doubled the returns of the ACES fund over the past 3-years, as has the GRID ETF. The two ETFs hold many of the same companies in the portfolio, so other than a higher concentration with the top-holdings, all I can deduce is that the QCLN ETF has better fund managers as compared to the ACES fund.

Risks

The clean-green energy focused companies held in the ACES ETF are not immune to the impact of the global economic environment - including higher than normal inflation, a rising interest rate environment, and a generally slowing global economy - partly or perhaps primarily due to Russia's invasion of Ukraine which broke the global food and energy supply chains. That helped goose inflation just as the planet was climbing out of the global pandemic and has led to the rapid and steep rise in interest rates.

Higher interest rates could pose a headwind to some of the clean energy companies that still require funding (equity or debt) for growth. Some of these companies are still not consistently profitable and, as a result, could fall out of favor relatively quickly.

Summary & Conclusion

The ACES ETF is operating in a high-growth sector but does not appear to be delivering for its investors. That being the case, I rate ACES at hold because I do like its top-10 holdings. However, QCLN continues to be my favorite ETF in the sector, and I rate it a BUY.

I'll end with a 5-year total returns comparison of the ACES and QCLN clean energy ETFs as compared to the broad market indexes represented by the Vanguard S&P500 ETF ( VOO ) and the Nasdaq-100 ( QQQ ):

As you can see, and despite the 2022 bear-market in the technology sector, the QCLN ETF has blown away the S&P500 and Nasdaq-100 over the past 5-years, as has the ACES ETF as well.

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