ICLN vs. QCLN: 2 Distinct Approaches To Clean Energy Investing

As oil prices continue to climb higher due to the Russia/Ukraine conflict, clean energy investments are getting another look. The EIA estimates that electricity generation from renewable sources could grow by 20% annually over the next few years. Read on to learn more about two clean energy ETFs, ICLN and QLCN, that aim to take advantage of this trend.

David Dierking   Updated March 17th, 2022

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ICLN vs. QCLN: Strategy overview

The iShares Global Clean Energy ETF (ICLN) tracks an index composed of global equities in the clean energy sector, including solar, wind, and other renewable sources. It applies exclusionary screens for controversial weapons, military contracting, tobacco, coal, oil, shale, and arctic oil and gas exploration. The final index consists of up to 100 companies weighted based on both market cap and a clean energy exposure score. Stocks with higher scores receive greater weighting in the portfolio.

The First Trust NASDAQ Clean Edge Green Energy ETF (QCLN) tracks an index of clean energy companies that engage in the manufacturing, development, distribution, and installation of emerging clean-energy technologies. These can include solar, wind, advanced batteries, fuel cells, and electric vehicles. Holdings within the portfolio are market cap-weighted. According to the index’s methodology, qualifying components must have a “demonstrated ability to capture the potential of the clean-energy sector by receiving a majority (50% or more) of its revenue from clean-energy and low-carbon activities.”

FundiShares Global Clean Energy ETF (ICLN)First Trust NASDAQ Clean Edge Green Energy ETF (QCLN)
MethodologyPassivePassive
IndexS&P Global Clean Energy IndexNASDAQ Clean Edge Green Energy Index
WeightingModified market capMarket cap
Inception DateJune 2008February 2007
Assets Under Management$5.2bn$2.0bn

ICLN vs. QCLN: Top holdings

There is some overlap between ICLN and QCLN, but these two funds are quite different. Both ETFs have five holdings that account for greater than 5% of their respective portfolios. Within the top 10, Enphase Energy, SolarEdge Technologies, and Plug Power are common to both funds.

At the sector level, the funds look quite different. ICLN has the majority of its assets invested in three industries – utilities, industrials, and tech. QCLN tilts much more towards tech and other growth-oriented names.

Because of its focus on traditional utilities, ICLN is cheaper and less volatile than QCLN. ICLN could be considered more of a defensive play in clean energy, while QCLN tilts more towards growth.

Geographic diversification

Geographic diversification is another differentiator between the two ETFs.

QCLN’s index says that it invests in companies that are “publicly traded in the United States”. That translates into a portfolio that consists of mostly domestic names. Israel is the fund’s second-largest country holding, while China comes in third.

ICLN tracks a global index and has over 30% of the fund invested in U.S. stocks, less than half that of QCLN. About 40% of the portfolio’s assets are invested in various European countries, with minor investments in Asia and the Middle East.

Holdings overlap

The overlap by weight between the two ETFs is only a modest 30%.

The difference between the two funds is evident when looking at the sector drift. ICLN has a much higher allocation to utility stocks, making it more conservative and higher-yielding than QCLN. The overweights in tech, and consumer discretionary names give QCLN a more growth-focused profile.

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ICLN vs. QCLN: Performance

ICLN and QCLN are two of the oldest clean energy funds in the ETF marketplace, having launched in 2008 and 2007, respectively. Despite the clean energy focus, they have performed very differently over time.

ICLNQCLN
1 Year-19%-18%
3 Year (ann.)30%43%
5 Year (ann.)21%30%
10 Year (ann.)11%19%
Since inception (ann.)-4%8%

QCLN has benefited from two trends that have taken place for more than a decade. Growth has outperformed value, and U.S. stocks have outperformed international equities. Both of these trends have favored QCLN and resulted in annual outperformance of 10%.

ICLN vs. QCLN: Expense ratios

Specialty ETFs, such as ones that focus on the clean energy space, tend to come with higher expense ratios compared to broad index funds. QCLN and ICLN fall into that category, but their expense ratios are still reasonable.

ICLNQCLN
Expense Ratio0.42%0.60%

ICLN is cheaper based on the expense ratio alone, but you should always consider the total cost of ownership, which adds trading spreads to the equation. Funds that are smaller and less liquid often come with higher trading costs. This can potentially negate any advantage on expense ratios. ICLN is larger and traded more often than QCLN, but trading spreads are comparable for both funds. Thus, ICLN holds the overall cost advantage over QCLN.

Should you invest in ICLN or QCLN?

The ICLN vs. QCLN debate is a good example of why it’s important to look forward instead of backward. The significant outperformance of QCLN over time has been a product of its overweights in both U.S. and growth-oriented stocks. Since trends like this don’t last forever, we could be heading into a decade where we finally see the return of international and value stocks. In that scenario, ICLN, and its global exposure, could be better positioned.

Both ETFs fall under the clean energy umbrella, but they’re quite different. It comes down to what you, as the investor, prefer. If you want an option that comes with higher growth potential and focuses on tech names, QCLN would be the better choice. If you want a fund that focuses more on clean energy producers, ICLN fits the bill. For those interested in names, such as Tesla, it’s worth noting that QCLN invests in electric vehicle companies, whereas ICLN does not.

Both ICLN and QCLN offer good exposure to the clean energy space, although they approach it in different ways. Both are concentrated, which is what you should look for when investing in clean energy. The fact that both ETFs have more than half of assets invested in the top ten names adds some idiosyncratic risk, but that’s to be expected in this sector.

The clean energy industry is early in its life cycle, and much growth is still in the future. Investors in these stocks should expect above-average volatility. Short-term returns can fluctuate significantly, and investors should maintain a long-term perspective.

💰 ICLN vs. QCLN: Takeaway

  • Clean energy is very topical and will be a high-growth theme for at least the next decade. ICLN and QCLN are both sensible options for investing in this space.
  • Which one is preferable depends on your risk tolerance and goals. QCLN is the more growth-oriented ETF, while ICLN has a more defensive tilt.

🔔 Compare ICLN to TAN, an ETF that focuses on solar energy.

Author: David Dierking, CFA

David Dierking has been writing about investment strategies using ETFs and mutual funds since 2007. He has extensively contributed to The Street, Investopedia, Seeking Alpha, ETFdb.com, ETF Trends, and ETF Daily News. David received his BA in finance from Michigan State University. He has also been a CFA Charterholder since 2004.

NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

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