PBW ETF: Renewable Energy A Megatrend

Investment Thesis

Invesco WilderHill Clean Energy Portfolio ETF (NYSEARCA:PBW) is an easy way to bet broadly on a megatrend that is here to stay. This industry has enormous political tailwinds and still a lot of expansion potential. In addition, the ETF already pays a dividend that is growing dynamically.

Renewable energies are a megatrend

Although controversial, it is relatively clear that renewables are here to stay. Even though they are not perfect and have weaknesses and hopefully will be developed further technologically, they also have a lot of advantages. Anyone who has ever been in a smog-polluted city can confirm this. In addition, electricity production is distributed over a large number of plants, which makes the supply of individual regions more secure. Moreover, solar energy is endless, while coal, gas, and oil will not last forever.

Especially since 2003, there has been a strong increase in energy production from renewable sources. In recent years, wind and solar energy have been the main contributors, with solar energy currently growing even more dynamically.

As the following chart shows, installed solar capacity worldwide has increased by 22% in 2021 compared to 2020. In most industrialized countries, solar now accounts for 1% – 3% of primary energy demand: USA 1.68%, China 1.95%, Germany 3.65%. Even more for electricity: USA 3.96%, China 3.85%, Germany 8.79%.

Wind energy is even more significant and contributes to primary energy demand: USA 3.89%, China 3.92%, Germany 8.77%. And for electricity: USA 9.11%, China 7.73%, Germany 19.9%.

These figures are already relatively high but still have a lot of room for expansion. On the one hand, I have only taken three countries as examples; there is much more potential in numerous developing countries. And in addition, the energy demand of the world is generally increasing. So it´s clear that companies focusing on renewable energy still have a lot of potential and enjoy a political tailwind.

ETF Overview

The Invesco WilderHill Clean Energy ETF invests in stocks of companies in the energy, utilities, alternative energy resources, independent power producers, and renewable electricity sectors. It uses full replication to track the performance of the WilderHill Clean Energy Index. The yearly expense ratio is 0.62%. Currently, the ETF contains 84 stocks, with the top ten representing only 17%. The ETF focuses on technology and industrial manufacturing companies rather than utilities and miners.

Valuation

Valuation plays less of a role due to the broad diversification. However, I want to look at the top five stocks, which comprise 9% of the ETF, to get an idea. Three key figures are sufficient for a rough overview: Forward P/E ratio (analysts’ estimates), annual revenue growth over the last five years, and net income margin.

	Forward P/E ratio	Revenue growth p.a. last five years	Net Income Margin
FSLR	29	1.47%	3.75%
ARRY	21	No data (but YoY growth was 78%)	-0.57%
SHLS	38	No data (but YoY growth was 37%)	4.70%
SGML	4.5	No data (revenue starts next year)	No data
THRM	20	2.46%	4.39%

Click to enlarge

When looking at these five stocks, I noticed that the P/E ratio is expected to grow relatively quickly. And for the stocks where 5-year data is unavailable, this and next year’s growth is very strong. I have written a separate article about SGML and am also invested here. ARRY, I have also checked in more detail and find the company very interesting. They produce equipment to align solar panels flexibly to the sun. The complete overview of the included stocks can be found here.

Performance

The historical performance over ten years is worse than the S&P 500. But over the last five years, the performance has been better. This is not surprising when you consider that topics like electric cars, ESG, and renewable energy were much more unknown ten years ago. The political and social tailwind has only been there for a few years. In addition, there were and are financial incentives in many countries. In Germany, for example, every homeowner received subsidies for years if he installed solar panels on his roof.

Dividend

A quarterly dividend of $0.4073 was announced just a few days ago. Annualized, this would be $1.61 and thus a dividend yield of 4.2%. So definitely an attractive dividend. Impressive is the growth rate of 48% per annum over the last three years, or 32%, compared to the previous year. This is even more astonishing as some companies in the ETF do not even generate profits, and many others do not pay dividends.

Volatility

As an investor, you have to keep in mind that the volatility is much higher in both directions. In such cases, I like regular but smaller purchases. Some brokers offer automated monthly savings plans, for example.

Risks and what I don´t like

But there are also risks and uncertainties here. Among other things, this concerns the potential margins of the manufacturers. We keep hearing that solar cells, for example, have become many times cheaper over the last ten years. That means manufacturers might sell more, but possibly the margin sinks. Of course, this is not certain; it depends on the production costs. What is definitely a negative factor is when raw material prices rise, making production more expensive and less profitable. Renewable energies require various raw materials, steel, copper, rare earths, and polysilicon. Many raw materials have recently risen sharply in price, partly due to the sanctions against Russia.

One risk, of course, is that the entire industry will be disrupted, which could happen, for example, through new forms of energy generation. In this context, we keep hearing about fusion energy, and there are also constant developments in research, but we still seem to be a long way from actual commercial use. This might be the future of power generation, but nothing that comes suddenly. You would have years to restructure as an investor.

What I don’t like about the ETF is that car manufacturers are also part of it. This is an entirely different industry and should not find a place in such an ETF. This has the consequence that you invest in stocks in which you might otherwise not invest, for example, Rivian (RIVN).

Conclusion

I think a broadly diversified investment in the renewable energy sector is almost a no-brainer because politics tells us exactly which direction the energy mix is supposed to move. And this is a worldwide movement, not only in western countries. Also, China, South Korea, Brazil, etc., are all massively expanding wind and solar.

I do not own exactly this ETF since this is not approved for trading in Germany, but quite a comparable counterpart and I invest automatically every month.