Going green in your portfolio would have beat the S&P 500 last quarter, even with the benchmark U.S. index having its best quarter in a decade.
The Nasdaq Clean Edge Green Energy Index (CELS) posted a 14.1% gain in the first quarter of the year (ended March) besting the S&P by a slightly more than a full percentage point. The CELS is a 42-stock, modified market cap based index meant to reflect the renewable and clean energy industry. You can't buy an index of course, but the one ETF based on the CELS, the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) did post a 13.4% gain in the quarter compared to 12.9% for the SDPR ETF (SPY), the largest SP500 ETF.
Why did eco stocks outperform the market? Ron Pernick, founder and managing director Clean Edge, the index developer, suggests a raft of publicity that got people thinking about the necessity of combating climate change, from a drumbeat of news about how renewable energy sources are replacing coal as a electricity source at a quickening pace to the widely hyped Green New Deal.
"While it’s too early to know how this will all play out, one thing’s for certain, the Green New Deal has brought climate change and potential solutions to the fore," Pernick writes in his quarterly commentary. There was also a move last quarter by New Mexico to go all renewable-energy, joining Hawaii and California, and strong movement toward the same in Illinois and Idaho, Pernick notes.
Based on weightings, the clean energy index gains were led by On Semiconductor (ON), a maker of chips used in a variety of applications, including LED lighting, solar inverter and device power management. Its shares gained almost 25% in the quarter. Another large component is Albemarle (ALB), a producer of lithium which is the storage medium of choice for electric cars and hybrid renewable farms (as well as portable devices). Albemarle, however, lagged the index, gaining just over 6%. Tesla (TSLA) was the most notable loser in the index, dropping nearly 16%. Tesla, though, did spark a huge gain in a clean edge component stock by announcing a deal to buy Maxwell Technologies (MXWL), an energy storage developer which more than doubled, from the low $2s to more than $4.
Other clean tech indexes performed well in the quarter too. The Clean Edge Global Wind Index was up 14.7%, Smart Grid Infrastructure was up 12.2% and U.S. water resources was up 16.5%. ETFs for each are offered by First Trust, and performance was about the same as the indexes. Another benchmark environmental stock index worth following, the Wilderhill Clean Energy Index also had a great quarter. The Invesco ETF based on it, PBW, posted a 24.3% gain in the first quarter.
Beyond news events that make climate change top of mind, what else is driving eco stocks? Prices for clean- and renewable energy are starting to fulfill the promise of being price competitive with conventional energy resources however you cut it. For one, it's widely reported lately that it's now cheaper to build a new renewable energy plant than to continue to operate an existing coal plant. That's driving large shifts by utilities to transitional cleaner energy like natural gas and renewables like wind, solar and hydro. Coal is one of the largest sources of greenhouse gases in the world. Five of the warmest years recorded on Earth have occurred since 2014.
From an investing perspective, I think an excellent analogy is the dotcom boom, bust and recovery. Just like dotcom stocks reached a fevered pitch in 2000, solar and other renewable energy stocks rode a similar path to a bubble peak in 2007, then burst in 2008. Recall it took a decade for Internet stocks to recoup their bubble losses (yes, even Amazon shares) as valuations and revenues came more in line and investors finally got over being spooked by the sector. Eco stocks have away to go to recover their valuations of last decade – the Wilderhill is about one-sixth its peak price still – but the first quarter is an encouraging sign for investors.