Rather than buy renewable energy ETFs, investors may want to consider commodity exposure.
Governments around the world are committed to combating climate change, with many pledging to become ‘carbon neutral’ at some future date. More than 170 nations have signed up to the Paris Climate Agreement, which commits them to trying to keep global warming below two degrees Celsius.
To achieve this, governments will have to try and rapidly reduce the use of fossil fuels used by both industry and individuals. To achieve this, governments have passed legislation and formulated policies to try and encourage the abandonment of fossil fuels in favour of alternative energy sources such as wind and solar, as well the development of new storage methods, notably batteries. In particular, governments are now trying to phase out the use of petrol-powered cars in favour of electric vehicles.
All this will take a lot of work, with some politicians calling for a ‘green industrial revolution’, with governments spending large sums of money trying to encourage this energy transition. This all creates plenty of growth opportunities that have been enthusiastically embraced by investors, be it the meteoric share price rise of Tesla (NASDAQ:TSLA) and other electric car companies or the flood of money pouring into the iShares Global Clean Energy ETF (LSE: INRG).
However, there is another way to think about this ‘green industrial revolution’ and the investment opportunities it creates.
According to the economist Frances Coppola, attempting to transition to a greener economy means we are moving from an economy that is dependent on carbon to one that is becoming dependent on metals. She says: “The world is transitioning from a carbon-intensive to a metals-intensive economy. Low-carbon technologies use much larger amounts of metal than traditional fossil fuel-based systems. Demand for metals is thus rising exponentially, fuelling a boom in mining and production.”
Coppola identifies three technologies that are leading to a boom in demand for metals:
- solar (photovoltaic) power
- wind power
- batteries and other forms of energy storage
Solar panels sit at the top of structures that are constructed of steel and aluminium. Several other metals such as indium, gallium and copper are also vital components. Wind turbines are made of steel, while copper is also often used. Meanwhile, lithium-ion batteries, as the name suggests, rely on the use of lithium. Also important for battery technology are nickel and cobalt.
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Looking more specifically at electric cars, Liberum Capital points out that electric vehicles use two to three times as much copper as conventional cars.
So, while one way to invest in the ‘green industrial revolution’ is to buy climate change and clean energy thematic ETFs, another way is to gain exposure to this boom in demand for metals.
ETFs for metals boom
The most popular (and the cheapest) ETFs for commodities usually track the Bloomberg Commodity Index.
The cheapest ETF on the interactive investor platform tracking this index is the L&G All Commodities ETF GBP (LSE:BCOG), which charges 0.16%.
The iShares Diversified Commodity Swap UCITS ETF (LSE:ICOM) also tracks this index for the slightly higher fee of 0.19%, as does the Invesco Bloomberg Commodity ETF (LSE:CMOD).
An alternative is the WisdomTree Enhanced Commodity ETF USD GBP (LSE:WCOG). This ETF tries to beat the Bloomberg Commodity Index. It differs from the index, and the ETFs tracking it, by selecting futures contracts with different ‘maturities’. Access to commodities is usually via futures contracts, which are contracts to deliver a certain amount of the commodity in question at a specified date. The price of these contracts can fluctuate in price the closer they are to maturity.
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Whereas the Bloomberg Commodity Index buys futures contracts with the same maturity, the WisdomTree ETF tries to be more dynamic, deciding each month, for each commodity in the basket, which maturity would provide the best return.
All these ETFs, however, offer broad commodity exposure. That means that their portfolios still have a wide exposure to non-metal related commodities such as agriculture, livestock or oil. These commodities may continue to perform well, but they are not part of the transition to a metal-intensive economy theme outlined above.
For those looking for concentrated exposure there is the WisdomTree Industrial Metals ETC (LSE:AIGI). This tracks the Bloomberg Industrial Metals Subindex, which is composed of futures contracts for aluminium, copper, nickel and zinc.
An alternative way to play this would be to opt for an ETF tracking mining companies rather than the price of the metals in question. For example, there is the VanEck Vectors Global Mining UCITS ETF (LSE:GDIG). This tracks the EMIX Global Mining Constrained Weights Index, composed of more than 150 companies primarily involved in the metal and mineral extraction industries. Its largest holdings include RioTinto (LSE: RIO), Vale (NYSE: VALE), BHP (LSE: BHP) and Glencore (LSE: GLEN).
A commodity ETF would simply give you gains in line with price increases. However, if the boom in demand for metals is sustained, companies involved in mining should see strong earnings growth and, with that, strong share price increases.
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