Clean Energy Industry Braces For The Trump Economy Redux

Global expenditures in clean energy and renewable power continue to set records, but the rising tide of rolling out new infrastructure projects isn’t translating to higher equity prices in all corners of the industry.

Using the five-largest clean-energy ETFs as a guide, year-to-date performance results vary widely through November 20. Two of the five funds are outperforming a conventional fossil-fuels dominated ETF (XLE) while the three are underperforming by wide margins (see chart).

The strongest performer: VanEck Uranium & Nuclear ETF (NLR), which has surged nearly 31% this year through November 20. That’s a hefty premium over the near-19% rise for the energy benchmark: Energy Select Sector SPDR Fund (XLE), which is dominated by conventional energy behemoths Exxon Mobil and Chevron. Critics argue that NLR’s focus on uranium as a power source for nuclear energy isn’t a genuine “clean” investment strategy. Fair point, but advocates of the sector counter that nuclear generates almost no carbon dioxide or greenhouse gases and so by some accounts it’s a green transition energy for the near term.

The second-best performer so far this year: First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (GRID) with a 20% rally in 2024. The fund tracks an index of stocks focused on so-called electricity energy infrastructure that’s used by companies in the “smart grid” niche.

The three other ETFs in the chart are deep in the red this year. Arguably this trio represents a more commonly cited mix of green energy companies. The biggest loser is Invesco Solar ETF (TAN), which is underwater by more than a third.

The clean-energy industry generally is bracing for what could be a volatile year ahead once Donald Trump takes office. The president-elect has claimed that climate change is a “hoax” and climate scientists are “alarmists.” He vows to withdraw the US from the Paris climate agreement (for a second time), a non-binding pact signed by 200 countries to reduce climate-warming pollution. In addition, Trump says he wants to repeal the Inflation Reduction Act (IRA), which represents America’s biggest program to date for clean-energy investment.

Despite the rhetorical headwinds, there are reasons to be cautious in assuming that it’s game-over for climate-related spending and, by extension, investment prospects for the weakest corners of the clean-energy sector. For starters, it’s important to note that a majority of Americans and, perhaps more importantly, a majority of Republicans say that climate change is real, according to a poll earlier this year by University of Chicago.

Meanwhile, efforts to kill the IRA may trigger pushback, including from Republicans. By some accounts, GOP states are receiving the lion’s share of the law’s benefits and spending. The E2’s report “Clean Economy Works: IRA Two-Year Analysis” notes that “despite the fact that no Republican voted for the legislation”, nearly 60% of the announced projects are based in Republican congressional districts. In addition, 19 of the top 20 congressional districts for clean energy investments are held by Republicans in the House.

To be fair, even if a Trump 2.0 economy is only a moderate setback for the clean-energy industry, the next four years could still be challenging if Washington is focused on slowing recent efforts to ramp up these businesses. But therein lies opportunity, at least in theory.

Consider that iShares Global Clean Energy ETF (ICLN), which has taken a beating this year, is trading at a trailing 13.7 price-earnings ratio, a significantly lower valuation vs. a 19.6 p/e for First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (GRID), which has rallied sharply in 2024, based on data published by Morningstar.com.

Valuation alone doesn’t dictate future performance, especially in the short term. But the possibility of over-sold assets that are priced for disaster could be surprise winners after 2024’s annus horribilis for some segments of the clean energy industry.