iShares Global Clean Energy ETF (ICLN) vs Invesco Solar ETF (TAN): Which Is the Better Buy?

iShares Global Clean Energy ETF (NASDAQ:ICLN) provides diversified renewable energy exposure at a lower cost, whereas Invesco Solar ETF (NYSEMKT:TAN) offers a concentrated, high-conviction play on the solar industry.

Investors seeking green energy exposure often choose between broad-spectrum funds and niche industry trackers. Both funds launched in 2008 and target the global transition toward sustainable power generation, such as wind, solar, and geothermal. While they occupy the same thematic space, their internal strategies and asset concentrations lead to significantly different risk-reward profiles for long-term portfolios.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The one-year return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

Cost is a significant differentiator here. The iShares fund is notably more affordable, charging a 0.39% expense ratio compared to the 0.7% fee for the Invesco fund. This price gap can impact long-term compounding, especially in the volatile renewable energy sector.

Performance & risk comparison

What's inside

iShares Global Clean Energy ETF provides exposure to a broad universe of global equities involved in the clean energy sector, seeking to track an index composed of 106 holdings. The portfolio is diversified across several key sectors, including utilities (33%), industrials (28%), and energy (26%). It also utilizes an ESG screen during the selection process to filter companies based on environmental, social, and governance criteria. Its largest positions include Bloom Energy Class A (12.09%), First Solar (9.52%), and Nextpower Class A (8.37%). This fund launched in 2008 and manages $3.2 billion in assets under management (AUM).

Invesco Solar ETF offers a specialized approach by focusing exclusively on the solar energy industry through the MAC Global Solar Energy Index. This results in a much more concentrated portfolio of 32 holdings. The fund invests at least 90% of its total assets in the securities, American depositary receipts, and global depositary receipts that comprise its index. Its sector allocation is heavily skewed toward energy (57%), utilities (22%), and technology (10%). Top holdings include First Solar at 11.74%, Nextpower at 9.80%, and Enphase Energy at 8.75%. This fund also launched in 2008 and currently manages $2.3 billion in assets under management (AUM).

For more guidance on ETF investing, check out the full guide at this link.

Which ETF is the better buy?

Since both ETFs debuted right before the Great Recession, their long-term annualized total returns remain negative relative to their lofty 2008 starting points. I point this out just to highlight the immense volatility inherent in thematic investing, especially in geopolitical industries like clean energy and solar. That said, ICLN and TAN have delivered annualized total returns of 12% and 13.5%, respectively, over the last decade -- strongly aided by the ongoing AI boom and the subsequent surge in energy demand.

As for choosing between the two ETFs, I could only consider buying ICLN, even though TAN has better one-year and ten-year returns. TAN’s higher expense ratio, larger drawdown, lack of dividends, and bigger beta make an already volatile investment area even more so. Furthermore, TAN only holds 32 stocks, whereas ICLN has over 100. When it comes to high-risk, high-rewards stocks like these, I’d prefer to have as many holdings as reasonably possible, in an effort to “hit” multiple multibaggers.

In addition to ICLN’s larger portfolio, it is also much more diversified, holding a range of energy stocks beyond solar. This could give it a massive leg up over the coming decade as the ongoing AI and data center boom could help keep propelling ICLN to new highs. While TAN may also benefit from this boom, its specialized focus on solar may have it missing out on some of the growth potential.

Lastly, since ICLN also holds First Solar, Nextpower, Enphase, and SolarEdge Technologies as top 10 positions, it has solar’s growth potential covered as well. For these reasons, I’d much rather buy ICLN.

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bloom Energy, First Solar, and Nextpower. The Motley Fool recommends Enphase Energy. The Motley Fool has a disclosure policy.