US Policy Whirlwind Threatens Clean Energy ETF Rebound

Clean energy funds that had begun to recharge after several years of setbacks are now grappling with fresh headwinds from recent actions by Congress and the White House.

ETFs and mutual funds focused on solar, wind power and other renewable energy sources have returned 18.5% year to date, on average, or about 8 percentage points above the S&P 500, data from Morningstar Direct show. That follows tough years for the category, due partly to the high cost of borrowing for clean-energy projects. In 2024, for example, such funds, on average, saw negative returns of over 13%. Average returns were -10% in 2023, -16% in 2022 and -3% in 2021. The much higher numbers so far this year follow implementation of the Biden-era Inflation Reduction Act, which provided tax incentives for alternative energy systems. And widely, the costs of materials have come down, said Hortense Bioy, head of sustainable investing research at Morningstar.

“The demand is there. As long as it costs less to produce energy from renewables, these companies will do well,” she said. “It depends on the cost of financing and the cost of materials. Because of innovation and competition, a lot of this is coming down.”

Hot Air

The outlook for the US market is cloudy, however, after Congress this year reversed some of the tax benefits for clean energy spending such as installing solar panels or buying electric cars. Government funding for large-scale projects has been frozen, in some cases for work that was nearing completion; President Donald Trump, a vocal critic of wind farms, has issued stop orders that are being challenged in court. 

Investments in US renewable energy projects fell by 36% in the first half of 2025 from the second half of 2024, BloombergNEF reported late last month. Still, investments have continued to increase globally, hitting a record $386 billion in the first half of this year, with more than half of that coming from solar projects. 

US ETFs have been affected differently, data from Morningstar Direct show:

• Fidelity’s $30 million Clean Energy ETF has had the strongest returns year to date, at over 31%, while the $4 million Horizon Kinetics Energy Remediation ETF returned 3%. (Separately, the Defiance Next Gen H2 ETF had negative returns of nearly 26%, but that fund liquidated in April.)
• Only two funds, the Invesco WilderHill Clean Energy ETF and First Trust Global Wind Energy ETF, brought in net inflows so far this year, at about $3 million and $4.5 million, respectively. As a category, clean energy ETFs bled a total of $753 million year to date.

Sunnier Forecast: The performance of subcategories in clean energy has varied recently, too. Some companies focused on solar power, for example, have not been as dependent on tax credits, which had been favoring residential solar installations. Further, the uncertainty around global tariffs is a factor, as China is a major producer of components, and it exports rare-earth elements needed for solar panels, Bioy noted. Even so, demand for clean energy has only increased in Europe, and there is a growing need for more power sources for data centers amid the AI boom, she said. “The long-term trend is that we need more renewable energy.”