With climate change accelerating at an alarming rate, global economies are striving to reduce carbon emissions to net zero. Embracing renewable forms of energy, such as wind and solar, helps achieve a part of the target. However, without land-based carbon sinks that absorb carbon dioxide like forests, it will be difficult to help the planet heal.
According to Bank of America’s head of global thematic investing research, Haim Isreal, the economic impact of climate change could reach $69 trillion this century. To counter such conditions, investment in the energy transition needs to increase to $4 trillion a year and that will include more than $100 billion a year in research and development.
Last year has been big for clean energy funds. The funds gained from heavy inflows into ESG investment as the coronavirus pandemic ravaged economies. Solar companies made triple-digit gains with a constant shift to clean energy as the outbreak devastated the global oil industry. Looking ahead into this year, President Joe Biden’s policy changes and rapid decline in renewable energy costs will contribute further toward appreciation of clean energy funds.
Among clean energy players, solar stocks have rallied since Biden got elected as his clean energy agenda was a big part of the election campaign. Immediately after the inaugural festivities, he signed a series of day-one executive orders that also included commitment to rejoin the Paris climate agreement. The clean energy plan calls for making the U.S. power sector carbon-neutral by 2035.
The clean energy plans imposed by Biden play a critical role in boosting solar companies. And this is because 63% of the electricity generated in America came from fossil fuels in 2019, according to the U.S. Energy Information Administration. Usage and generation of fossil fuels impact climatic change heavily. Series of executive orders have been passed to combat climate change, including spending $400 billion on federal procurement of renewables, batteries and electric vehicles, reorienting government’s energy purchases, ending fossil fuel leasing and easing renewable energy development on federally-owned lands. And extension of solar tax credits by two years, which gives a 26% tax credit for both solar and solar plus storage installations, has helped reduce the cost of solar projects.
Additionally, Biden has canceled the permit for the construction of the Keystone XL pipeline from Canada and called for an “immediate review” of the Trump administration’s action. Some of those actions have ignored environmental protections.
Top 3 Fund Choices
The Climate Clock is ticking and countries are racing against time to save further damages. Hopefully, this combination of policy changes and technological advancements should continue to drive the clean energy space. We have selected three alternative energy mutual funds with a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.
We expect these funds to outperform peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).
Fidelity Select Environment and Alternative Energy Portfolio FSLEX aims for capital appreciation. The non-diversified fund invests majority of assets in common stocks of companies principally engaged in business activities related to alternative and renewable energy, energy efficiency, pollution control, water infrastructure, waste and recycling technologies, or other environmental support services.
This Zacks Sector – Other product has a history of positive total returns for more than 10 years. FSLEX has three and five-year return of nearly 10% and 15%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
FSLEX has an annual expense ratio of 0.85% versus the category average of 1.04%. Additionally, the fund has significant investment in alternative energy companies like Tesla, Cummins and Linde.
New Alternatives Fund Class A NALFX aims for long-term capital appreciation, with income being the secondary objective. The fund invests in common stocks of YieldCos, American Depository Receipts, real estate investment trusts and publicly-traded master limited partnerships.
This Zacks Sector – Other product has a history of positive total returns for more than 10 years. NALFX has three and five-year return of 29.2% and 22.7%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
NALFX has an annual expense ratio of 1.08% versus the category average of 1.28%. Additionally, the fund has significant investment in alternative energy companies like Innergex Renewable Energy, Vestas Wind Systems and Nextera Energy.
Calvert Global Energy Solutions Fund Class A CGAEX aims to track the performance of the Calvert Global Energy Research Index. The fund invests majority of assets in companies whose main business is sustainable energy solutions. The portfolio consists of companies engaged in facilitating the transition to a more sustainable economy through the reduction of greenhouse gas emissions and the expanded use of renewable energy sources.
This Zacks Sector – Other product has a history of positive total returns for more than 10 years. CGAEX has three and five-year return of 19.9% and 15.5%, respectively. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.
CGAEX has an annual expense ratio of 1.24%, which is below the category average of 1.29%. Additionally, CGAEX has significant investment in alternative energy companies like First Solar, Nextera Energy Partners and Terraform Power.
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