Climate Change Showdown in D.C.: Energy ETFs in Focus

Bickering between Democrats and Republicans is nothing new, an American tradition right up there with apple pie, baseball, and fireworks on the 4th. Even on issues that would seem to lend themselves towards a consensus resolution, the two parties have found ways to create disagreements, allowing them to play to the American public and paint their opponents as unreasonable or unconcerned politicians. With signs that the economy is finally beginning to turn (even if it is only the beginning of a long and slow journey back), Congress has turned its attention to clashes that had been tabled and neglected as they battled over bailouts, stimulus plans, and other economic measures. As they slowly turn their attention away from the crisis that has consumed the first half of the year, two issues appear to be taking center stage: healthcare and energy.

While debate in Washington over proposed healthcare reforms is a familiar tune at this point, regulation over climate change and development of alternative energy sources is a fairly new topic brought about by changing times. As the Wall Street Journal’s Greg Hitt and Stephen Power write, the climate change issue isn’t going away any time soon, and is likely to be a defining point in next year’s midterm elections.

According to Democrats who devised and are supporting the controversial bill, the proposed legislation could spur billions of dollars of annual investments and create more than a million jobs, hastening the development of a “green economy” in the U.S. But Republicans argue that the measure is too costly and intrusive, instead endorsing an alternative plan focusing on increasing the use of nuclear power and providing incentives for development of renewable fuels.

A resolution to the conflict is by no means imminent, as revisions and additions to both bills are still being discussed by various parties. As the competing bills are revised and updated, they will likely face heavy scrutiny not only from members of Congress but from Wall Street as well. Earlier this week, President Obama pledged to “make clean energy the profitable type of energy,” echoing one of his campaign promises to fully commit to the development of sustainable energy forms that can flourish without government subsidies. Now the question is: which types of clean energy will actually be profitable?

As the ETF industry has expanded in recent years, an increasing number of sector-specific funds have popped up, including several focused on various corners of the energy markets. Among the funds that could be in focus as this situation plays out in Washington are:

• Market Vectors Coal ETF (KOL): Investing in companies that generate a majority of their revenues from the global coal industry, KOL investors are likely very interested to see how the debate in Congress plays out. As corporations around the world come under increased pressure to reduce carbon emissions, the coal industry seems to be bound for some changes in coming years. The efficiency and sustainability of alternative energy sources, including “clean” coal technology, will go a long way towards determining how this industry performs over coming years.

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• Market Vectors Nuclear Energy ETF (NLR): Despite the stigma associated with nuclear power, it is a viable clean energy option, unlike other technologies that have been slow to attract investment dollars and prove themselves to be profitable and sustainable. How large a role nuclear power plays in the big picture going forward remains to be seen, but as mentioned above, it is a critical element of the Republican bill. Another option in this space is iShares Global Nuclear Energy ETF (NUCL), but this fund is still on the small side and may suffer some liquidity issues.

Disclosure: No positions at time of writing.

Comments

[Mad Hedge F...:]

It's one minute before high noon. If the 2009 Clean Energy Bill passes, it is going to pave the way for major structural changes to the US economy, which few of the non-engineering types voting for it in Congress understand. The bill encourages electric power utilities to switch to renewables, upgrade the electric power grid, and put in place a cap and trade system which places an enormous burden on the power industry to go green (see XXX). The bill is expected to sail through the House, but faces a major fight in the Senate, where the administration is going to have to get all of their ducks in a row for it to pass. The bill provides the legal structure to spend that $100 billion for alternative energy already passed in the stimulus bill. In his cheerleading press conference for the bill, Obama correctly declared that dependence on hydrocarbons was jeopardizing our national security. He also cleverly described this as a massive creator of high tech jobs that can’t be exported. I’m not highlighting this because I live in California, wear sandals all year, drive a Prius, or have a refrigerator stuffed as if a giant gerbil does my shopping. Since this economic crisis started, the key has been to buy whatever the government is buying, and since they are going into alternatives in a big way, you want to be right ahead of them. Time to add more alternative energy names to your list to buy on dips. Look at American Superconductor (AMSC), which is involved in advanced wind turbine designs and electric power grid upgrades. Also take a peek at Covanta (CVA), an established business that profitably burns trash to create electricity.

Jun 25 04:43 PM

[2banana:]

History will repeat itself. Oil will drop to $20 in the midst of a worldwide recession. We will wonder why we spent so much money and got so little in return when the market clearly told us the right direction.

Jun 25 04:54 PM

[Paul in Texas:]

If the 2009 Clean Energy Bill makes it into law, our energy prices will skyrocket and the cost of everything will soar. We will have a MAJOR hit to our economy that I'm not sure we will ever be able to recover from unless cap and trade is repealed. I think cap and trade is one of the worst things anyone can do to our economy. Right up there with 'spreading the wealth'.

Jun 25 05:13 PM

[ETF Grind:]

There are about dozen other ETFs that should merit focus.

Jun 25 06:15 PM

[tweaks:]

"In his cheerleading press conference for the bill, Obama correctly declared that dependence on hydrocarbons was jeopardizing our national security. "

Correctly declared? WTH is that supposed to mean? Not allowing us to drill for OUR OWN hydrocarbons is jeopardizing our national security. Denying us the ability to produce energy and then declaring that the lack of energy is a problem is typical political bull c**p. I can only hope that you didn't mean what you typed.

Jun 25 09:26 PM

[athena:]

If you liked the deregulation of the investment banks and the games Enron played then you will LOVE cap and trade.

Jun 26 10:25 AM

[quick:]

All you guys that love to bash cap and trade aren't taking into account of the full cost of producing energy with fossil fuels. Sure coal is cheap to produce, but the costs that don't show up on your electric bill are things like all the health care costs associated with all the garbage getting spewed into the air, the costs of cleaning up the environmental damage caused by mining coal (mountain top removal, anyone?), and of course the future costs of dealing with climate change. When you produce electricity with solar, wind, and geothermal, you don't have these other hidden costs associated with them.

Jun 26 11:52 AM