Alt Energy ETFs: Separating Profit Potential From the Hype

I am always fascinated by the questions that I receive from readers of ETF Expert as well listeners of my radio show, "In the Money with Gary Gordon." Often, a question takes me by surprise.

For example, few investments have been as rocked as hard by the global equity sell-off as the alternative energy space. And yet, Scott wonders, "Is now the time to get behind 'wind' like T. Boone Pickens?"

In truth, I've been a bigger advocate for a quick transition to natural gas for automobiles. Wind, solar and nuclear all have pros and cons for longer-term energy independence.

Yet when it comes to investing, even "green investing," one has to separate the hype from the true profit potential. Yes, venture capitalists are pouring money into the segment. Yes, the world is itching for solutions beyond fossil fuels.

But that still doesn't mean paying 23-25x earnings for marginally profitable hopefuls. That goes double when traditional energy in the SPDR Energy (XLE) has a P/E of 9.

Put another way, alt energy ETFs have suffered more than almost any segment in 2008. Try to find another area that's down 50% in 8 brief weeks.

Alt Energy ETFs in 2008				4 Weeks	8 Weeks	12 Weeks	2008 YTD
Powershares WilderHill Clean Energy (PBW)				-41%	-48%	-45%	-62%
Powershares Global Clean Energy (PBD)				-40%	-47%	-46%	-56%
Market Vectors Global Alt Energy (GEX)				-42%	-49%	-44%	-55%
Market Vectors Global Nuclear Energy (NLR)				-35%	-43%	-47%	-54%
First Trust Global Wind Energy (FAN)				-39%	-46%	N/A	N/A

So when might it make sense to "get your green on?" One of the indications that make the most sense would be the 50-day moving average. When alt energy ETFs are showing some short-term strength, they'll climb above the 50-day trendline.

Granted, this may take some time to develop. Yet it's clear that alt energy has been way out of favor since it broke down completely at the start of September.

 

For those that feel they need to purchase closer to a potential bottom, even with the risk that it may entail, I would recommend an incremental purchasing approach. For instance, if you want to sail with the First Trust Global Wind (FAN) sooner rather than later, plan to purchase in 3 increments. Grab a 1/3 today, grab another 1/3 in 6 weeks, grab another 1/3 in 12 weeks. Incremental purchasing, also known as dollar cost averaging, will spread out your risk in the volatile green world.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[quick:]

I bought a little more GEX today for my IRA. If you're in these ETFs for the long run instead of just trying to trade them, now is a good of time as ever to get in.

2008 Oct 22 10:00 AM

[Road Runner:]

Not much content other than standard advice like "dollar cost averaging" and watching the "50-day moving average". Gary, your article doesn't match your title. So which stocks or ETFs are "hype" and which have "profit potential"?

2008 Oct 22 10:30 AM

[NOWHEREMAN:]

How about 10% now, 10% two weeks from now and go to a different sector.

2008 Oct 23 12:51 AM