Tesla (TSLA -3.70%) stock continues its ascent higher as investors pile into growth stocks and artificial intelligence opportunities. But at its core, Tesla is a play on the energy transition and electric vehicles (EVs) gaining market share over gas-powered alternatives.

Tesla is the largest holding in the First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN 0.26%). But the exchange-traded fund (ETF) offers so much more than just Tesla exposure. Here's why it's a hidden gem ETF with a bright future ahead of it.

A winding road through a lush valley at sunset.

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A unique ETF

One of the best reasons to invest in an ETF over an individual stock is to get generalized exposure to a certain industry or type of stock (growth, value, income, etc.). When you think about clean energy, you probably think of solar and wind energy stocks. And while that's certainly a part of the Clean Edge Green Energy ETF, there's actually a lot more to it than that. Here are the top 10 holdings in the ETF and their respective weighting. Together, these top 10 holdings constitute just under 60% of the fund.

Company

Ticker

Classification

Weighting

Tesla

(TSLA -3.70%)

Automobiles

11.14%

On Semiconductor 

(ON -0.63%)

Semiconductors

9.72%

Albemarle

(ALB 2.33%)

Chemicals: diversified

7.99%

First Solar

(FSLR -0.65%)

Renewable energy equipment

7.01%

Rivian Automotive

(RIVN 0.48%)

Automobiles

6.60%

Enphase Energy

(ENPH 0.39%)

Renewable energy equipment

5.84%

Lucid Group

(LCID 2.40%)

Automobiles

3.13%

Universal Display

(OLED -1.00%)

Electronic components

2.95%

Brookfield Renewable Partners

(BEP -2.89%)

Alternative electricity

2.69%

Allegro Microsystems

(ALGM -1.86%)

Semiconductors

2.58%

Data source: First Trust.  

There are a lot of semiconductor and EV companies, but there are also solar technology companies, renewable power utilities, and even a top lithium producer, Albemarle.

A lot of other clean energy ETFs focus too much on power producers, while the Clean Edge Green Energy ETF focuses on the nuts and bolts, inputs, and resources required to make the energy transition a reality.

Reasons to own and not to own the Clean Edge Green Energy ETF

The ETF contains a wide variety of technology manufacturers, developers, distributors, and installers. So it's a great way to gain exposure to companies you've probably never heard of that are instrumental players in the energy transition.

However, the biggest drawback of the ETF is that it does have a lot of exposure to EVs. Tesla is the largest holding at 11.1%. And right behind it is On Semi -- a maker of automotive chips -- with a 9.7% weighting. Coming in at third place is Albemarle, which again is a play on EVs through increased lithium demand for battery packs.

All told the ETF is more geared toward EVs than it is on clean energy in general. However, if you're interested in EVs and believe that they are disrupting the transportation industry and will play a key role in slowing down the advance of climate change, then there are a lot of benefits to owning this ETF.

A common way of investing in EVs is through an automaker like Tesla, Rivian, or Lucid -- all holdings of the ETF. But there is so much more to the industry than automakers. And the Clean Edge Green Energy ETF is a way to invest in the EV supply chain rather than just the automakers.

A foundational holding for EV investors

The Clean Edge Green Energy ETF is down 29.3% over the last two years and is hovering around a two-year low. It could remain challenged in the short term, as EVs remain a growth industry that is vulnerable to high interest rates and slowing consumer discretionary spending.

The ETF has a 0.58% expense ratio. For context, you can buy an S&P 500 index fund for an expense ratio under 0.1%. The Vanguard Growth ETF and the Vanguard Value ETF both have expense ratios under 0.05%. And many sector ETFs also have near-zero expense ratios. So investors are certainly paying a higher price for the services provided by the Clean Edge Green Energy ETF. It's not ideal, but there is an argument to be made that the price is worth it for the international exposure and diversification, which would be difficult and tedious to replicate by buying individual securities. What's more, the difference in expense ratios wouldn't be a big deal unless it was a huge position. For example, a $1,000 investment at a 0.58% expense ratio is only around $6 compared to $1 for an ETF with a 0.1% expense ratio. 

The best use of the ETF is as a core holding for investors to buy and let compound over years, if not decades to come. After all, EVs remain a small percentage of new passenger vehicle sales, and an even smaller percentage of fleet vehicles. It will take time for the industry to really make an impact. Investors patient enough to wait should take a look at the Clean Edge Green Energy ETF.