Alternative-energy investments are leaving their traditional peers in the dust.
The First Trust Nasdaq Clean Edge Green Energy Index Fund is trading at a record high. The iShares Global Clean Energy GCEI 2.70% Exchange-Traded Fund has surged to its highest level since 2010, and the Invesco Solar ETF TAN 0.88% is at its highest point since 2011.
All three funds, which languished for years before taking off in 2020, have surged more than 80% this year, partly because investors are betting they stand to benefit from presidential candidate Joe Biden’s green-energy proposals.
Mr. Biden has outlined a $2 trillion plan to fight climate change and has pledged to put the U.S. on a path to a 100% clean-energy economy by 2050. The funds’ gains have accelerated in recent weeks as the former vice president’s standing in the polls has improved.
Traditional energy companies, meanwhile, continue to struggle with the economic fallout from the coronavirus pandemic, which has sapped demand for fossil fuels. The S&P 500’s energy sector is down 49% this year, by far the worst performer of the index’s 11 groups.
“What’s happening in the energy market is a reflection of a long-term shift,” said Andrew Lee, head of sustainable and impact investing at UBS Global Wealth Management.
The fate of energy companies is closely tied to oil prices, which have tumbled 34% this year and more than 70% from their highs in 2008. That is partly due to a supply glut that has coincided with a historic drop in demand.
Renewable energy use, on the other hand, in the U.S. doubled from 2000 to 2018, when it comprised about 17% of total energy generation, according to the Center for Climate and Energy Solutions.
One result of that trend: NextEra Energy Inc., a utility focused on wind and solar and other renewable energy sources, last week became the largest publicly traded energy company in the U.S., with a $148 billion market capitalization.
That pushed it above the $147 billion market cap of Exxon Mobil Corp. , a company whose roots trace back to John D. Rockefeller’s Standard Oil monopoly. As recently as 2013, Exxon was the largest U.S. company with a market value above $415 billion. Its fortunes changed as it doubled down on oil and gas production, even as rivals pivoted toward renewable energy.
Mr. Lee said the changing tide illustrates the interest from both retail and institutional investors in alternative energy. Global investment in new renewable energy totaled $132 billion in the first half of 2020, according to Bloomberg New Energy Finance, up 5% from a year earlier.
In the U.S., private-equity firms like Altus Power America and Scale Microgrid Solutions are committing hundreds of millions to alternative-energy projects. Investment giant Blackstone Group, which raised a $4.5 billion fund in 2019 for energy projects, has made renewables a key focus.
The trend toward alternative energy should endure no matter who wins the White House, said Mizuho analyst Anthony Crowdell.
For one thing, the infrastructure costs for renewables like wind and solar have come down significantly in the past years, he said, adding companies like NextEra and electric-power producer Entergy Corp. are particularly well positioned. NextEra shares are up 25% this year, while Entergy has dropped 12%.
As for policy, he noted that states set their own energy policies that won’t be affected by which party controls Washington, and the tide is moving toward renewables in many states.
“That is what is clearly winning in the marketplace right now,” Mr. Crowdell said.
Still, some investors say renewable-energy stocks are looking increasingly expensive. NextEra is trading at 41.8 times its earnings over the past 12 months, while SolarEdge Technologies Inc., a maker of smart energy products that has more than tripled this year, is trading at 91.2 times earnings. In comparison, Exxon is trading at 21 and the S&P 500 is at 26, according to FactSet.
The divide between renewable and traditional energy companies is expected to be on display when earnings season kicks off in earnest later this month. Energy companies are projected to suffer by far the biggest year-over-year hits to their bottom lines of the sectors in the S&P 500, according to FactSet.
Renewable companies aren’t immune to the realities of the economy, but they aren’t expected to take the same hit. NextEra is expected to report about an 8% rise in per-share earnings, according to FactSet, while Entergy is seen reporting about a 5% contraction. Both companies sit in the S&P 500’s utilities sector.
Exxon, on the other hand, warned earlier this month that it remains under financial pressure, partly due to weaker refining margins. The company, which was recently removed from the Dow Jones Industrial Average, is expected to report its third consecutive quarterly loss.
Exxon isn’t the only big energy company facing stress. The market caps of 22 of the 25 largest oil-and-gas companies in North America and Europe fell in the third quarter, according to S&P Global Market Intelligence.
Even the world’s foremost oil cartel has a bearish view on the future of oil. The Organization of the Petroleum Exporting Countries on Thursday predicted oil demand has peaked in developing countries, projecting it will fall more than 10% this year and never return to pre-pandemic 2019 levels.
At the same time, alternative energy is expected to continue to post gains. Globally, OPEC projects nuclear, biomass and renewables to comprise 27.5% of the world’s energy demand by 2045, up from 18.7% currently.
“We recommend investors take note of the shifts toward the new economy,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
Write to Paul Vigna at [email protected]