Rivian Automotive (RIVN -1.43%) and Lucid Group (LCID -2.06%) are two exciting electric vehicle (EV) start-ups. Both companies have received rave reviews for their products -- Rivian for its electric pickup truck, SUV, and delivery van, and Lucid with its luxury electric sedan line.

Unfortunately for shareholders, both stocks are currently hovering around their all-time lows for a number of reasons. The main issue is that both companies are unprofitable and burning through cash at a breakneck pace. Another is valuation -- both stocks reached prematurely high market caps, only to come crashing down to more modest levels.

High interest rates are also a looming headwind because it's now more expensive to borrow money. This headwind is a double-edged sword that also affects potential customers who are less incentivized to make a large discretionary purchase, since it is more expensive to finance.

A charger plugged into an electric vehicle surrounded by blue light.

Image source: Getty Images.

Add it all up, and both stocks understandably find themselves in "prove it" mode. And for that reason, investors interested in Rivian and Lucid may find it beneficial to buy an exchange-traded fund (ETF) instead of going all-in on either stock. One ETF that stands out is the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN 0.12%). Here's why this ETF is a great buy now.

A primer on the Clean Edge Green Energy fund

The Clean Edge Green Energy Fund has been around since 2007. Back then, ETFs weren't nearly as widespread as today. So this is one of the more veteran clean energy ETFs out there.

The objective of the ETF is simple: invest in the energy transition and track the Nasdaq Clean Edge Green Energy Index. To quote First Trust's summary of the fund: "To be eligible for the index, a security must be issued by companies classified as technology manufacturers, developers, distributors, and/or installers in one of the following sub-sectors: advanced materials, energy intelligence, renewable electricity generation, and renewable fuels, or energy storage and conversion."

Put another way, the fund's components can be large and small companies from just about every industry that touches the energy transition. 

If we look at the fund's holdings as of March 24, we can see that there's a nice blend of diversification between semiconductors, EV companies, solar companies, utilities, operators, and financers. On the EV front, three companies are top 10 holdings -- Tesla (TSLA 0.62%) makes up 8% of the fund, Lucid is 3.9%, and Rivian is 3.1%.

But the fund also has positions in EV charging companies like ChargePoint Holdings, with a 1.3% allocation, as well as modest positions in Blink Charging and EVgo, with 0.2% and 0.1% allocations, respectively. There are also 0.1% or fewer stakes in Swedish EV maker Polestar Automotive and Workhorse Group.

Here's a look at the fund's breakdown by industry as of Dec. 30, 2022:

Industry

Allocation

Renewable Energy Equipment

26.23%

Semiconductors

17.05%

Automobiles

15.54%

Alternative Electricity

13.17%

Chemicals: Diversified

10.09%

Alternative Fuels

4.18%

Electronic Components

2%

Electrical Components

1.86%

General Mining

1.69%

Data source: First Trust 

Some of the largest renewable energy equipment holdings include well-known companies like Enphase Energy, SolarEdge Technologies, and Plug Power. Alternative electricity mostly refers to utilities. Chemical companies in the fund are mostly lithium producers like Albemarle and Sociedad Química y Minera de Chile S.A. And alternative fuels include EV charging companies, among other low-carbon producers like renewable natural gas and hydrogen.

Pros and cons of investing in this ETF

Low-cost ETFs have a lot of advantages over buying individual stocks. The Clean Edge Green Energy Fund grants access to a wide variety of industries and companies through a mix of established industry leaders, as well as smaller, less-proven companies. This diversification provides a nice blend of stability and potential upside.

One of the more intangible benefits of investing in an ETF is that it is easier to keep position sizing in check. With individual stocks, it can be easy to lose track of the size that a single industry or type of stock that makes up in your portfolio. Put another way, it's easy to accidentally invest in too many correlated stocks, such as a lot of small gap growth stocks, EV stocks, etc. This accidental overallocation can cause unexpected volatility during bear markets, as we've seen over the past few years. 

An ETF solves this problem by balancing positions across different industries. Of course, a downside of this balance is that there's less potential upside from a single stock like Rivian or Lucid.

Another con is the expense ratio. The Clean Edge Green Energy Fund has an expense ratio of 0.58% -- which is higher than larger funds but not unreasonable, considering the service the fund provides. But it's still an added cost that isn't present when buying stocks with zero trading fees. 

Build an EV portfolio that is built to last

Investing in a diversified ETF is probably not a good fit for someone that just wants to open a starting position in a few specific EV stocks. But for those who want to be building a portfolio of clean energy stocks for years to come, incorporating a foundational holding like the Clean Edge Green Energy Fund can be an effective strategy.

The ETF provides a base layer of skin in the game. From there, an investor could add to the ETF, explore other ETFs, or increase holdings in individual stocks that the ETF underrepresents.

Everyone's approach will vary based on portfolio size, what you're interested in, risk tolerance, time horizon, etc. But all told, it's hard to go wrong with the Clean Edge Green Energy Fund -- especially now that it is down over 22% in the last year.