Q&A: Investing in the Renewable Energy Transition

By now, many investors are well aware of the extent to which market volatility and inflation are chipping away at their buying power. However, fewer are probably tuned into the incredible, historic race the world is in to get to net zero carbon emissions by 2050, or what an expansive investment opportunity is connected to that mission. Investors in the capital markets are on the front lines, leading the way by funding the infrastructure to make the great renewable energy shift possible.

The rush to get to net zero carbon emissions and shift to renewable sources of energy is a priority for three of the largest global economies—the US, China and the UK. While many investors instinctively understand the opportunity at hand, it’s not always easy to know the best way to participate. To help, here are frequently asked questions from an investor perspective. The FAQs are meant to serve solely as a conversation starter between investors and financial advisors and may provide:

• Answers to common questions around some broader issues (like the great renewable energy shift and how commodities in general may function to help hedge portfolios against the full effects of market volatility and inflation)
• Information about the Harbor Energy Transition Strategy ETF (ticker: RENW), Harbor Capital’s new ETF centered on energy transition commodities

Frequently Asked Questions

Is renewable energy a good long-term investment? I consider myself a more thoughtful investor and I tend to invest for long-term goals.

We believe the global shift to renewable energy is not a fad. In fact, we think the transition from fossil fuels to lower carbon sources of energy is a generational change. We would also contend that this is a durable, longer-term investment theme that is evolving and accelerating.

To your point about being a more thoughtful investor, many investors like you may consider a commodities-based ETF like RENW in an effort to gain access to the energy transition theme. Your financial advisor can detail the special considerations in your case.

What’s the best way for individual investors to invest in renewable energy?

Investors have options when it comes to investing in cleaner energy. Some investors may choose to invest in stocks to gain exposure. In other words, they prefer to buy shares in companies either directly or via ETFs or mutual funds.

Companies are subject to many factors and outside forces that impact their success, including competitive, management and shareholder-based influences. We believe commodities offer a more direct way to participate in energy transition, since they are the raw materials needed to build this new societal infrastructure. Without them, we can’t transition the world to cleaner energy, and many of the world’s nations have pledged to do so by 2050. As such, these “energy transition commodities” are expected to be in high demand for decades to come.

The best way to invest, of course, is different for different investors. The good news is that investors have choices. For those that are interested in commodities, including physical commodities ownership and futures contracts, owning physical commodities is largely impractical for most investors. A commodity futures-based ETF may be a great alternative.

The Harbor Energy Transition Strategy ETF (RENW) is the only broad commodities futures-based ETF focused on energy transition.

What role should commodities play in an investor’s portfolio?

What’s right for one portfolio may not be right for another. That said, commodities as an asset class have historically proven to be strong portfolio diversifiers. A diversifier aims to lower overall portfolio risk by introducing different sources of return potential.

Diversified commodities investments can help investors potentially reduce overall portfolio risk by virtue of the fact that commodities as an asset class are generally not correlated to stocks and bonds. This means that regardless of thematic focus, commodities have historically done well when the broad stock and bond markets falter.

Commodities may play an additional role in your individual portfolio like hedging inflation or gaining access to the energy transition theme. Make sure to clarify with your advisor what the expected function of a commodities holding would be in your case.

ETFs typically work well as a structure for accessing broad-based commodity futures strategies. Some of the benefits of ETFs include:

• Cost effectiveness: ETFs are generally cost-efficient vehicles for gaining access to many different asset classes and investment types including commodity futures strategies¹.
• Liquidity: The ETF vehicle can be traded throughout the day, which provides intra-day liquidity for shareholders.
• Tax-efficiency: Due to the in-kind exchange of shares, the ETF vehicle may allow for greater tax efficiency and reduced costs.
• Transparency: The availability of daily holdings may allow investors to make more informed investment decisions.

What if inflation moderates? Will an investment in RENW and commodities make sense?

This is a great question with many facets. First, we believe decarbonization is a very long-term investment theme. RENW’s intent and design are meant to capture that theme with the commodities expected to facilitate the transition to cleaner sources of energy.

Another conversation to have with your advisor could be around the factors causing inflation in the economy, and what type of investment vehicle may act as an effective inflation hedge.

Commodities have historically shown to be a strong inflation hedge and there is no way of knowing how long inflation will persist. Remembering that they also are strong diversifiers may be an added benefit to holding commodities as a long-term strategic position within a portfolio.

Certainly, decarbonization is going to require significant global investment. While there are other structural reasons that inflation may persist, it is also true that the race for net zero carbon emissions, itself, may play a part in keeping it around.

It stands to reason that any massive, long-range, coordinated effort to quickly build infrastructure and capacity for something that has never existed is going to drive demand and impact costs of raw materials. For example, demand for the metals used in renewables and electrification alone can reasonably be expected to increase.

Against this backdrop, an allocation to commodities as an inflationary hedge, diversifier, and/or means to accessing energy transition may make sense for many qualified investors.

What are some examples of how commodities are linked to energy transition?

There are several examples of how commodities serve as the foundation for the future of clean energy, including:

• Electric vehicles: EVs are gaining market share vs. internal combustion vehicles, but we’re still in the very early stages of the EV transition. Every new electric car battery requires commodities like nickel and copper to build.
• Natural gas: Although not a “green” source of energy, natural gas is a less carbon intensive resource that can serve as a bridge fuel as the world moves toward a long-term net-zero goal.
• Wind & solar: Rare earth elements are a core component of the magnets used in wind turbines, and silicon is a key element in the development of solar panels.

Important Information

¹The Fund is non-diversified and may invest a greater concentrate of its assets in a particular sector of the commodities market (such as metal, gas or emissions products). As a result, the Fund may be more susceptible to risks associated with those sectors.

Investing involves risk, principal loss is possible. Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. The ETF is new and has limited operating history to judge. Shares are bought and sold at market price not net asset value (NAV). Market price returns are based upon the closing composite market price and do not represent the returns you would receive if you traded shares at other times.

Commodity and Commodity Linked Derivative Risk: The Fund has exposure to commodities through its and/or the Subsidiary’s investments in commodity-linked derivative instruments. The Fund’s investments in commodity-linked derivative instruments (either directly or through the Subsidiary) and the tracking of an Index comprised of commodity futures may subject the Fund to significantly greater volatility than investments in traditional securities.

Diversification does not assure a profit against loss in a declining market.

The Fund is non-diversified and may invest a greater concentrate of its assets in a particular sector of the commodities market (such as metal, gas or emissions products). As a result, the Fund may be more susceptible to risks associated with those sectors.

Authorized Participant Concentration/Trading Risk: Only authorized participants (“APs”) may engage in creation or redemption transactions directly with the Fund.

Energy Transition Risk: The commodities included in the Index may become less representative of energy transition trends over time and the Fund’s investments may be significantly impacted by government and corporate policies.

Foreign Currency Risk: Because the Index may include futures contracts denominated in foreign currencies, the Fund could be subject to currency risk.

ETFs are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are generally minimized for the holder of the ETF. An ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying portfolio. However, capital gains tax may be incurred by the investor after the ETF is sold.

The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice or a recommendation to buy a particular security.

Foreside Fund Services, LLC is the Distributor of the Harbor Energy Transition Strategy ETF. Quantix Commodities LP (“Quantix”) is a third-party subadvisor to the Harbor Energy Transition Strategy ETF.

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