Want to Invest in Renewable Energy but Don't Know How? Try This ETF.

Although renewables are the future of energy, the road between here and a fully renewable energy environment will likely be long and tricky to navigate. Not all of the companies in the sector will live up to the hype. Unless you’re an expert on the subject, it’s tough to know which individual stock names will be worth investing in.

There’s a simple solution: Just own a basket of renewable energy stocks — like an exchange-traded fund (ETF) — that someone else monitors and updates as needed. To this end, the iShares Global Clean Energy ETF (ICLN -0.15%) is one of your best — and easiest — bets.

Plenty of opportunities in clean energy

If you think the clean-energy business has exploded over the past 10 years, the best is yet to come. Long-awaited legislation favoring renewables is finally kicking in.

Case in point: The Inflation Reduction Act that became law last year offers homeowners considerable tax credits for installing or improving solar power systems — up to 30% of their total cost.

The Defense Production Act signed into law by President Joe Biden in mid-2022 provides 24 months’ worth of tariff-free imports of solar panels into the United States, while U.S. panel manufacturers prepare for their own expansion incentivized by the bill. All told, the nation’s solar-panel production capacity could double by the end of Biden’s term.

Image source: Getty Images.

The U.S. Energy Information Administration reports only about 5% of the United States’ current power production is provided by solar, and only about one-fifth of the country’s total power production comes from renewable sources. But with the new legislation and incentives, the administration estimates this proportion will more than double to 44% between now and 2050. Solar power alone is projected to account for more than half of this growth.

Most other developed nations are also incentivizing the switch to renewable energy, yet the rest of the world meets most of its electricity needs with non-renewable fuels.

Drilling into the ETF

While the stage is bullishly set for the iShares Global Clean Energy ETF, its real upside to U.S. investors is the exposure it offers to foreign renewable energy companies.

But first, this fund’s two biggest holdings are Enphase Energy (ENPH 1.18%) and SolarEdge Technologies (SEDG 1.64%). Both focus on solar panel technology, although neither actually makes solar panels. They both manufacture inverters that turn the sun’s rays into AC power. While inverters themselves have been around as long as solar panels have been commercialized, SolarEdge’s and Enphase’s inverters make them easy for homeowners to manage. Both manufacturers’ equipment can be controlled by an app. It was the lack of this easy interface that may have been holding solar power’s adoption back.

The iShares Global Clean Energy ETF gives exposure to the solar panel business itself, too. First Solar is the fund’s third-biggest holding.

The ETF also owns a sizable stake in Spanish utility company Iberdrola, Denmark’s Vestas Wind Systems and Ørsted, Portugal’s EDP-Energias de Portugal, and Brazil’s Centrais Eletricas Brasileiras. The Brazilian utility says it is one of the three cleanest energy companies in the world. Roughly three-fourths of its power comes from hydro, and more than 90% is carbon-free electricity.

These companies not only offer exposure to holdings outside the United States, but they also provide exposure to renewable sources other than solar. Perhaps best of all, the iShares Global Clean Energy ETF has several stocks that are otherwise difficult (if not impossible) for U.S. investors to buy.

Meant to be a (very) long-term position

The iShares ETF is not your only choice. The First Trust Nasdaq Clean Edge Green Energy Index Fund (QCLN -1.15%) is another good renewables option, and if you’d like to limit your focus to just solar energy, the Invesco Solar ETF (TAN -0.68%) works well.

The complexities and never-ending changes of the renewable energy market make the iShares fund an easy choice. Just bear in mind it’s best used as a truly long-term holding.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Ørsted A/s. The Motley Fool recommends Enphase Energy and SolarEdge Technologies. The Motley Fool has a disclosure policy.