After a bumper 2013, the green energy space has seen modest trading so far this year due to valuation concerns. The industry trends, however, continue to improve and seem encouraging with the U.S. and China deciding to jointly act on the new climate change plans after prolonged talks. The pact could act as a new catalyst for the industry and build a positive momentum in the space (see: all the Alternative Energy ETFs here). 

U.S.-China Deal in Focus

Under the deal, President Obama vowed to reduce greenhouse gases faster than before while China decided to cap carbon emissions for the first time. Both countries account for more than one-third of greenhouse gas emissions and are the world’s largest polluters.

Obama’s new target calls for a 26–28% drop in carbon emissions from 2005 levels by 2025. This goal is much higher than the earlier expectation of 17% emission reductions by 2020. Notably, the pace of reduction in fossil-fuel emissions would double, starting 2020. On the other hand, China pledged to cut carbon emissions by 2030. For this ambitious goal, the country is seeking to install more panels and increase the non-fossil fuel share of all energy to around 20% by 2030. In fact, it is expected to install as much as 8 gigawatts of small solar systems this year, more than 10 times built last year.

While this historic treaty would hurt companies relying on dirty fuel sources like coal and coal ETF, it is a boon for the clean energy ETF space. Let’s dig into these for more details (read: 3 Clean Energy ETFs for a Green Portfolio):

ETFs to Benefit

iShares Global Clean Energy ETF ((ICLN - ETF report))

The accord looks to improve energy efficiency as well as reduce other non-carbon emissions. It will encourage other countries to follow suit in cleaning the climate, resulting in a broad-based plan. As such, the deal will clearly benefit a variety of clean energy firms across the globe. As per the International Energy Agency, renewable energy would account for nearly half of the increase in global power generation to 2040, overtaking coal as a leading source of electricity.

While there are several options available in the broad clean energy space, ICLN looks excellent in this pro-clean energy environment as it provides global exposure to 31 clean energy stocks, including solar, wind and other renewable source. This product tracks the S&P Global Clean Energy Index and charges 47 bps in annual fees and expenses. It has amassed just $63.6 million in its asset base while volume is also light at about 32,000 shares.

China and U.S. takes the top two spots in terms of country exposure with 30.1% and 21.7%, respectively, of ICLN. Other countries like Spain and Brazil also make up for a decent allocation. The ETF is down about 3% in the year-to-date time frame (read: Clean Energy ETFs: Losers of the Crude Oil Crash?).

Market Vectors Uranium & Nuclear Energy ETF ((NLR - ETF report))

Nuclear operators, which are currently struggling with rising costs, aging reactors and declining profits, will definitely get a boost from carbon emission reduction. As nuclear power does not have any greenhouse emission, the demand for these power plants will pick up in the U.S., allowing operators to ask for subsidies in order to keep the operations running. This would drive profit margins for the operators and result in higher stock prices.

Investors seeking to tap this positive trend in the space could find NLR an intriguing choice. This fund provides targeted exposure to the nuclear energy utility companies with a little portion in uranium miners. It follows the Market Vectors Global Uranium & Nuclear Energy Index and holds 53 securities in its basket. The fund is moderately concentrated on the top 10 holdings at 55.9%.

American firms dominate the portfolio with 63.5% of assets while Japan also takes a substantial 21.2% share. The product is often overlooked by investors as depicted by AUM of $69.3 million and average daily volume of about 4,000 shares. It charges 60 bps in fees per year from investors and has added 8.4% so far this year.

Guggenheim Solar ETF ((TAN - ETF report))

While the U.S. looks to clean up environment by using a combination of wind, solar and geothermal, solar is arguably the fastest growing sector within the clean tech industry. Further, China is also looking to promote wider use of solar energy for rooftop installations. This is because solar power is the cheapest form of energy, and eliminates transmission and distribution investment (read: Solar ETFs Hot Again; Brighter Days Ahead?).

One way to benefit from an increased use of solar power is via TAN, a popular solar-focused ETF that tracks the MAC Global Solar Energy Index. The product has accumulated $307.2 million in its asset base and trades in solid volume of more than 283,000 shares a day. It charges investors 71 bps in fees per year. Holding 29 stocks, the fund is highly concentrated on the top 10 firms accounting for 63.5% of total assets.

The U.S. and China take the largest share at 47.3% and 21.4%, respectively, followed by Hong Kong (19.4%). The fund has lost 2.7% in the year-to-date time frame.

Coal ETF: A Major Loser

The black diamond is already facing immense pressure in the U.S. in recent months as solar power is gradually replacing dirty coal in electricity generation while natural gas is becoming a more popular fuel input for power plants. In China, the world's largest coal producer and consumer, the consumption of coal is gradually decreasing. This trend is likely to continue in the coming years, as higher solar installation commitment by China in its deal would help the country to get rid of the dirtier coal-fired power quickly.

With that being said, Market Vectors Coal ETF ((KOL - ETF report)) has lost 14.4% so far this year and will continue to be the biggest laggard in the energy space. This product offers global exposure to the coal industry by tracking the Market Vectors Global Coal Index. Holding 33 securities in the basket, it is a bit concentrated on the top 10 holdings with no single company making up more than 8.6% of the portfolio (read: Black Days Ahead for Coal ETFs?).

The fund definitely has a U.S. focus as roughly 39% of the fund goes to American stocks while China rounds off the second spot at 23.2%. It has AUM of $153.3 million and trades in good volume of 142,000 shares a day on average. Expense ratio came in at 0.59%.