Biden’s Green Infrastructure Juggernaut Is Here. A Few ETFs to Play It.

All of this is meant to help the U.S. run 100% carbon free by 2035.

“This is one of the better government bills that will benefit us,” Christian Magoon, chief executive of Amplify ETFs, told Barron’s shortly after the president unveiled the infrastructure plan in Pittsburgh. “There is a tilt toward electric vehicles and their technologies, and the types of batteries that will have a [market edge] versus solar and wind technologies.”

Specifically, the plan offers Americans a $7,500 rebate to purchase an EV, versus the current option of claiming it as a tax credit, That would mean car buyers wouldn’t have to wait to file their taxes to get their money—a move that Magoon says would bolster sales. The incentives also prioritize American-made cars, giving Tesla (ticker: TSLA) an edge over Chinese competitors such as NIO (NIO), or other foreign rivals like Volvo (SE: VOLV. B), he added.

There are 14 green-energy ETFs. Most had strong runs last year and are down along with other fast-growing stocks this year.

The largest are the $5.7 billion iShares Global Clean Energy (ICLN) and the $2.8 billion First Trust Nasdaq Clean Edge Green Energy Index (QCLN). Both rallied on news of the infrastructure package, although they were still down 16% and 4%, respectively, year to date, on Tuesday afternoon.

Both are market-cap-weighted and own companies expected to benefit from the president’s plan to sustainably modernize American infrastructure: NIO; Plug Power (PLUG), the supplier of hydrogen fuel-cell batteries; and Enphase Energy (ENPH), which designs home-energy storage and other systems.

The iShares ETF tracks an index of 30 of the most liquid companies involved in clean energy—biofuels, ethanol, geothermal, hydroelectric, solar, and wind. More than two-thirds of its assets are in international companies. Perhaps most notably, it doesn’t own Tesla. That, in part, is why its return for the past year is “only” 160%.

The First Trust ETF is more U. S- focused, with 80% of its assets in domestic companies, including 8.5% in Tesla. It also owns clean-energy firms involved in advanced materials, the smart grid, energy storage, and renewable energy. The stocks it owns tend to be pricier. The fund has a price/earnings ratio of 41, compared with the iShares ETF’s 32, and the category average of 31, according to Morningstar. Its returns are also in line with the most growth-focused funds: The First Trust Clean Edge Green Energy Index ETF is up 269% for the past year.

“The EV space is going to be very exciting this year,” says Jane Edmondson, who runs EQM Indexes. “The global share of EV sales will go to 20% in the next few years compared to 3% now. People are excited when they see new options from Tesla and Volkswagen. And the Ford Mustang is also pretty cool.”

The bill will likely help niche players, like Magoon’s $125 million Amplify Lithium & Battery Technology (BATT) ETF, which owns battery-material firms including those that mine lithium, nickel, manganese, and graphite. 

Edmondson says that solar and wind power will grow as a result of Biden’s announcement that the U.S. will support offshore wind technologies, with reports showing wind towers soon peppering parts of New York’s Long Island.

“The news is great for offshore, which has not taken off in the U.S.,” Edmondson says. Hydrogen is also an exciting area, she adds, with two ETFs launching in mid-March.

These include the Defiance Next Gen H2 ETF (HDRO) and Direxion Hydrogen ETF (HJEN). Hydrogen fuel-cell company Plug Power and peers Ballard Power Systems and ITM Power, make up HDRO’s top holdings. Meanwhile, HJEN invests in 30 firms “leading the way toward net-zero emissions” and operating in the hydrogen production and generation, storage and supply, fuel cell/battery and hydrogen systems and solutions businesses. 

While Plug Power recently suffered from having to restate its finances following an accounting error—the shares fell 20% on March 17—the sector still holds a lot of promise as new battery technologies come to the fore, Edmondson adds.

The future does look very green, but investors should be wary of the red. Clean-energy stocks have had a huge run-up, making them particularly susceptible to a fall on anything less than stellar news. 

The Invesco Solar ETF (TAN), for instance, fell 18% in the past quarter and could suffer from the U.S.’s dependence on China’s solar photovoltaic chips, especially if political relations sour further, according to Edmondson. “If Biden wants to create American jobs and put money back into U.S. initiatives, we need to build solar capacity in the U.S.,” she says.

A dearth of chips, both for solar panels and EV manufacturing, is also a nagging market risk, says Jon Maier, chief investment officer at Global X ETFs. “There is a global chip shortage and that can affect the EV space,” he says. “The U.S. makes a lot of chips but China doesn’t. We need to build more factories but we need time and the right technology. Some Chinese companies, such as NIO, have had trouble as a result of this and this could weigh in the market for the next couple of years.”

Diversification away from China can help offset some of these risks, Maier says. Too much exposure to power utilities could also be problematic as rising rates could pressure their businesses by lifting their borrowing costs. The iShares Global Clean Energy ETF has nearly half its assets in power utilities of various types. The $186 million Global X Cleantech ETF (CTEC), in contrast, has just 3% of its assets in power utilities, and 45% in industrials, 36% in IT and 15% in materials, Maier says.

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