Green Tech Stocks Still Have Room to Grow. Here's How They Can Fit Into Your Portfolio
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President Joe Biden took only a few hours to rejoin the Paris agreement after taking office last week.
That’s just one part of the president's ambitious climate plan, which includes cutting fossil fuel emissions with a $2 trillion investment in green energy. With Democrats in control of Congress, he may be able to make some progress on his green agenda. Investors agree: solar energy stocks jumped on the news of Democrats winning the Georgia runoff elections.
Interest in green tech companies like energy providers, which would likely benefit from Biden's plan, isn’t new. Energy technology company Enphase Energy has jumped over 500% in the last year, and the iShares Global Clean Energy ETF, is up around 160% from a year ago.
Yet experts say these shares still have room for growth.
Why 2021 is the year of green tech
There are a few large trends that are fueling green tech, aside from Democratic control of the White House and Congress. Governments across the globe are making commitments to transitioning to carbon-neutral economics, says Andrew Lee, head of sustainable and impact investing at UBS Global Wealth Management. Last year, South Korea made a carbon neutral pledge, joining China and Japan. Meanwhile, the European Union agreed to cut its carbon emissions.
There are also the fundamentals: the cost of solar and wind has come down significantly, making them more competitive with fossil fuels. In many parts of the world, they are actually the cheaper option, Lee adds.
Consumers, businesses and investors are also increasingly aware of the risks that are out there from an environmental perspective, Lee says. Enter so-called ESG (or environmental, social and governance) investing, a growing trend in which investors look for companies that meet certain criteria in measuring their environmental and societal impacts. Morningstar’s head of sustainability research wrote that he expects the 2020 flows into sustainable mutual and exchange-traded funds to have neared $50 billion, compared to just over $20 billion in 2019.
Look beyond the usual suspects
When you think of “green tech” you might automatically think of renewable energy or electric car companies. But the space is much broader than that, says Daniel Milan, a financial advisor and managing partner with Cornerstone Financial Services in Southfield, Mich.
“It’s not just solar, not just automobiles or renewables,” Milan says. “But what it takes to make all those.”
That can include battery companies, hydrogen fuel cell systems semiconductors or biofuels, to name a few.
While the previously mentioned and well-known iShares Global Clean Energy ETF (ICLN) focuses on energy specifically, Milan likes the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) because of its diversity. The fund includes companies focusing on energy as well as biofuels, advanced batteries, electric cars and more. For example, Cree, one holding in the fund, is a semiconductor company. While you might not think of semiconductors as “green tech,” they’re necessary to run some of these technologies, Milan adds.
You can take the same approach with specific companies. For example, in the electric vehicle space, Tesla is the giant, but there are other companies doing similar work that deserve attention from investors, says George Schultze, founder of Schultze Asset Management based in Rye Brook, NY. He likes General Motors, which turned around its business after filing for bankruptcy in 2009, announced last year it planned to spend $27 million on electric and autonomous vehicles through 2025. The automaker also recently announced partnerships with Microsoft and delivery companies like Fed-Ex involving these types of vehicles. Schultze also likes automaker Stellantis, a product of the Fiat Chrysler-Peugeot merger. The company has 29 electric models and recently announced it plans to offer 10 new electric vehicle models in 2021. There are a lot of startups that are also coming into the space, looking to supply batteries or components for electric vehicles, and while it’s hard to tell now which ones will come out winning, it’s a space to watch closely.
Many investors overlook waste management as part of renewable resources, says Josh Simpson of Lake Advisory Group in Lady Lake, Fla. Two stocks he includes in his clients’ portfolios are Waste Management and Republic Services, which are both using waste to generate power.
Keep in mind that if you’re investing in broad index funds already, you likely have some green tech in your portfolio (the S&P 500 is around 28% in information technology, which includes green tech companies). Beyond that, investing in a specific sector like green tech can be risky, says Charles Sachs, a financial advisor at Kaufman Rossin Wealth. The lion’s share of your investments should be in a globally diversified portfolio. If you think an investment in green tech will boost your returns, it should make up no more than 5% to 10% of your overall holdings.
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