Crude oil is traded in an international market. It is no secret that oil prices are incredibly volatile and easily susceptible to geopolitical and weather-related events. As the world makes the slow shift towards pollution prevention and clean energy for the maximum societal impact, it may be time to consider diversifying your portfolio.
Many investors want to get out of the fossil fuel business and start investing in the green energy sector but don’t want to research individual alternative energy companies. The solution is renewable energy mutual funds.
The Benefits of Clean Energy Mutual Funds
When you invest in a stock, you buy shares of the company. As a result, you make money in two ways. First, the stock may offer dividends, which may provide a payout every quarter or year. Alternatively, you also make money when you sell them. Your profit is the difference between the selling price and your purchase price, minus trading fees.
Unfortunately, stocks are riskier than mutual funds. Stock prices continuously change throughout the day. Within a short period of time, the stock price could double, or it could plummet, and your shares would be worth almost nothing.
On the other hand, mutual funds pool a lot of stocks into a fund. Instead of owning a share in an individual company when you purchase a stock, now you own a share of the mutual fund, which has multiple stocks. As a result, even if one of the stocks in the portfolio plummets or goes to zero, the effect on the fund will be muted and much more manageable as compared to a shareholder of that individual stock.
Because of diversification, mutual funds alleviate some of the risk involved associated with investing. Of course, this risk reduction comes with a return trade-off. Mutual funds typically won’t increase as much as an individual stock.
What to Look for in a Renewable Energy Mutual Fund
Identifying the best clean energy or solar mutual fund is slightly different from the best practices for investing in solar stocks. Here are some things to consider when choosing your mutual fund.
Mutual funds have front-end loads, where you pay fees and commissions up front when you make your investment. Back-end loads are funds that charge investors a fee when they sell or redeem their shares. These back-end fees may progressively lessen over time to incentivize investors to hold onto their investments. A no-load mutual fund means that no one is receiving any commission when you purchase the fund.
Another cost is the mutual fund’s expense ratio or its annual operating expenses. This ratio is a percentage of its assets and applies to all mutual funds.
It is essential to weigh the fees, commissions, and operating expenses associated with your mutual fund choice. Choosing a low fee or a no-load mutual fund as well as a fund with a low expense ratio is best to allow your money to grow and meet your financial objectives without the costly management fees.
How long a mutual fund has been around for, and its track record performance is a good indicator that it is a worthy investment. Ideally, you want a mutual fund that has performed well in different market environments with a history of strong returns. One good year is not enough to demonstrate stability worthy of a long-term investment.
The track record of the mutual fund should ideally match up with the tenure of the fund manager. For example, a fund’s past 5-year performance is not as relevant if the fund manager has a tenure of one year.
While different fund managers will make different investment decisions than the previous manager, most managers mentor their successors for several years. Therefore, if a mutual fund has a stable and strong performance record, a new fund manager may be worth considering.
A fund’s turnover ratio is the rate that the fund manager keeps the stocks in its portfolio. Higher turnover ratios result in more expenses. A lower turnover ratio implies that the manager is confident in his investments and is exercising a buy-and-hold strategy.
The Best Renewable Energy Mutual Funds
Not all alternative energy mutual funds are solely focused on renewable energy. Some mutual funds may have non-energy related companies in their portfolio. Here is our curated list of the top clean energy mutual funds to buy.
1. Renewable Energy Mutual Fund: Guinness Atkinson Alternative Energy (GAAEX)
Expense Ratio: 2.57% (gross); 1.98% (net)
Fund Manager: Edward Guinness, Will Riley, Jonathan Waghorn
Turnover Ratio: 36.54%
Guinness Atkinson Alternative Energy has an inception date of March 31, 2006. This mutual fund is committed to cleaner energy and allocates at least 50% of business to renewable energy or energy efficiency. These energy or renewable power sources include solar energy, solar power, wind, hydroelectric, tidal wave, geothermal, natural gas, biomass and biofuel energy.
The fund managers follow the Guinness Atkinson 4-criteria stock selection process. They evaluate a stock’s valuation (discounted cash flow), quality (return on investment), sentiment (analysts’ earnings forecasts), and price momentum (relative performance over the past 3, 6, and 12 months).
Over the past ten years, GAAEX has lost approximately 14% annually. However, it is vital to remember that the alternative energy sector is still in its early stages. GAAEX fund manager Edward Guinness says, “Concerns about fossil fuel supply and climate change will drive the growth of alternative energy over the next 10 to 20 years.” Moreover, sustainable growth of the renewable energy industry should come when alternative energy costs are competitive with fossil fuels. As a result, GAAEX is an excellent option as a long-term opportunity for investors.
2. Renewable Energy Mutual Fund: Fidelity Select Environment and Alternative Energy Portfolio (FSLEX)
Expense Ratio: 0.87% (gross); 0.87% (net)
Fund Manager: Kevin Walenta
Turnover Ratio: 62%
Fidelity Select Environment and Alternative Energy Portfolio has an inception date of June 29, 1989. Approximately 89% of its assets are domestic equities with nearly 7% allocated to international investments. What is remarkable is that FSLEX invests typically at least 80% of assets in companies that are principally engaged in alternative and renewable energy, energy efficiency, pollution control and pollution prevention as well as waste and recycling technologies.
The year to date annual return for FSLEX is +19.62%. The average yearly return over the past three years is +13.82% and over the last ten years is +11.04%.
As of March 2019, FSLEX has 47 holdings, of which its top ten holdings account for over 50% of its total portfolio. Its main objective is capital appreciation.
3. Renewable Energy Mutual Fund: Calvert Global Alternative Energy Fund (CGAEX)
Load: Front 4.75%
Expense Ratio Class A: 1.69% (gross); 1.24% (net)
Expense Ratio Class I: 1.43% (gross); 0.99% (net)
Fund Manager: Christopher Madden, Thomas Seto, Jade Huang
Turnover Ratio: 38%
The Calvert Global Alternative Energy Fund has an inception date of May 31, 2007. This small to mid-stock fund seeks long-term growth of capital by investing at least 80% of its net assets in alternative energy equity securities. This mutual fund contains foreign investments as well as domestic equities.
The fund focuses on companies that sustainably manage energy use or that are actively involved in transitioning to a more sustainable economy to combat environmental problems. Their goals are to reduce greenhouse gas emissions and expand the use of renewable energy sources.
The fund’s year to date annual return is +16.84%. The average yearly return over the past three years is +6.23% and over the last ten years is -1.95%.
4. Renewable Energy Mutual Fund: New Alternatives Fund Class A (NALFX)
Load: Front 3.5%
Expense Ratio: 1.37% (gross)
Fund Manager: David J. Schoenwald, Murray Rosenblith
Turnover Ratio: 18%
New Alternatives Fund Class A invests in renewable energy sources for the future, including solar, wind, and hydroelectric power. They also invest in companies that create a sustainable economy and support energy conservation and recycling.
While this mutual fund has a front-end load of 3.5%, the percentage decreases as the purchase amount increases. This fund is best for individual and institutional investors seeking long-term capital growth through renewable energy and energy conservation investments by means of socially responsible companies.
NALFX started trading in 1982 and was called the “‘greenest’ fund in the United States” by the Economist in November 1989. It was the first environmental mutual fund and the first mutual fund to concentrate on renewable energy and energy conservation investments.
The fund’s year to date annual return is +15.86%. The average yearly return over the past three years is +10.39% and over the last five years is +6.07%.
5. Renewable Energy Mutual Fund: Shelton Green Alpha Fund (NEXTX)
Expense Ratio: 1.30%
Fund Manager: Jeremy Deems, Garvin Jabusch
Turnover Ratio: 13%
The Shelton Green Alpha Fund has an inception date of March 12, 2013. The fund’s core investment philosophy is the belief in a “green economy.” NEXTX promotes to improve human well-being and social equity while reducing environmental risks and ecological scarcities. The ultimate vision is for the world to become environmentally sustainable.
While NEXTX is not a pure alternative energy mutual fund, they invest in companies of all sizes that align with their investment philosophy to address pressing global green issues. As of March 2019, their top ten holdings include Vestas Wind Systems A/S, Pattern Energy Group Inc, First Solar Inc, and Canadian Solar Inc.
Under normal market conditions, at least 80% of its total assets will be invested in United States common stocks and American Depository Receipts or ADRs.
The fund’s year to date annual return is +27.94%. The average yearly return over the past three years is +11.54% and over the last five years is +5.54%.
2017 was a confusing year for “green” mutual funds. President Trump’s pro-coal agenda caused investors to pull out $68 million. However, in the first four months of 2017, investors poured money back in, totally nearly $83 million into 22 green funds.
While alternative energy is still an emerging market, investors are likely convinced that clean energy will continue to grow. The Federal Energy Regulatory Commission or FERC released their 2018 Energy Infrastructure report that revealed that renewable sources now account for 21.0% of total available installed U.S. generating capacity. This is up 5.0% from five years ago.
As more investors gear up for the potential rise in renewable energy mutual funds and stocks, now is the time to take advantage of this incredible long-term investment opportunity.