The First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN 1.78%) is tailor-made for investors seeking exposure to a variety of clean energy solutions, from utilities to technology companies, automakers, lithium producers, semiconductor companies, industrial suppliers, and more.
But the exchange-traded fund (ETF) is down 21.3% so far year to date (YTD) -- easily underperforming the S&P 500's 21% YTD gain. Here's why the ETF could soar in 2024 and why it may be right (or wrong) for you.
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A purposeful investment
The Clean Edge Energy Fund is ideally suited for someone who wants to invest in the energy transition, not just a particular industry. The largest holding is Tesla, and the third largest holding is Rivian Automotive -- two electric vehicle (EV) companies. But the second largest holding is ON Semiconductor Corporation, a key supplier of chips for drive trains used in EVs.
The fourth largest holding is First Solar, a panel manufacturer, while the sixth largest holding is Enphase Energy, which is a solar inverter and solar solution company that converts DC power to AC power, mostly for residential customers. Then you have Albemarle, a lithium supplier, as the fifth largest holding. Those six top holdings make up 42.9% of the total fund.
So right off the bat, you can see a lot of variety from the fund's top holdings. As you go down the line, you'll find exposure to companies you may have never heard of, especially in alternative energy.
A good chunk of the fund is invested in unproven, unprofitable growth stocks. For that reason, the fund may not be suited for everyone. But if you're fine with taking on risk or waiting for a play to pan out, then the Clean Edge Energy Fund's aggressive allocation and exposure to many different parts of the energy transition may be right for you.
Why the fund has sold off
You may be wondering: If the Clean Edge Energy Fund is so diversified, then why has it underperformed the broader market by so much this year? The biggest reason is simply interest rates.
Many of the holdings rely on debt financing to fund their growth -- and maybe even their operations. As interest rates rise, it makes it more expensive to take on debt, which may persuade some companies to pull back on their capital investments. It also affects the customers of many of these companies.
For example, buyers who depend on financing a car payment may be less inclined to buy an EV when interest rates are high. Residential and solar customers may want to put off a solar project until interest rates come back down. These headwinds have a ripple effect throughout the supply chain. So although the fund has a lot of good qualities, the sell-off is largely justified.
Why the fund is worth buying for 2024
A lot is going wrong across many industries affiliated with renewable energy. And when there's a widespread sell-off in companies that benefit from a multi-decade secular growth trend as powerful as the energy transition, that's usually a buying opportunity.
There's not really a single industry in the ETF that is doing particularly well right now. Even Tesla, which has had a great year in 2023, has suffered margin compression and slowing growth. The main reason the stock is up this year is because it sold off way too much in 2022 -- not because the fundamentals are great right now.
Investing in the Clean Edge Energy Fund takes a certain amount of risk tolerance, time horizon, willingness to take a contrarian approach, and overall interest. But if these factors make sense for you and your financial goals, the fund is worth buying on this sell-off.
The downturn will eventually end. When it does, interest rates will likely be lower, and investors will be reminded of the long-term tailwinds of the energy transition. Once that sentiment shift happens, then many top holdings in the ETF could rebound quickly. It may take time, but the ETF has the makings of an excellent long-term investment.
