Popping the Clean Energy Fund Bubble Will Set the Stage for Future Growth

I'm on vacation this week, so I'm going to leave you with a preview from a presentation I will be giving at the Colorado Renewable Energy Conference on Aug 29 in Golden Colorado. I'm updating my Investing in Renewable Energy presentations, and I've been able to incorporate a lot of the work Charles and I did on clean energy mutual funds and ETFs since January this year.

ETF Holdings Revealed

Charles did some in-depth work looking at the holdings of the ETFs this spring, and I turned it into this graph (click for the high-res version):

Looking at the holdings data, I've changed my favorite clean Energy ETF to QCLN, since it has a moderate expense ratio, and has more exposure to some of my favorite Clean Energy subsectors: Energy Efficiency, Clean Transport, Batteries/Electricity Storage, and Geothermal than my previous favorite, ICLN, which I picked mainly because of the expense ratio. However, I think QCLN underweights clean transport and wind more than I would like, so another good option for larger portfolios would be a portfolio of 80% QCLN and 10% each of FAN and PTRP. I prefer FAN to PWND because FAN is more focused on the wind supply chain, while PWND has more of a focus on wind park operators (Power Production.)

Evidence of a Clean Energy Fund Bubble

I also updated my chart of the number of clean energy mutual funds from March to reflect the closure of the Airshares EU Carbon Allowances Fund (ASO):

If that does not look like a bubble (in clean energy funds) I don't know what does. It just goes to show that solid fundamentals do not prevent bubbles... solid fundamentals are often the foundation on which bubbles build their castles in the sky, to mix a metaphor. However, if you do have solid fundamentals (as I believe clean energy does) the popping of the bubble just sets the stage for years of healthy growth.

Presentations on Stock Picking

That's not the core of the presentation, but I like to cover mutual funds and ETFs when talking to a general audience of Alt Energy enthusiasts. The real meat of the presentation, for me, is picking clean energy stocks. For that, you'll need to wait for future articles, or come to my presentation at CREC, or the Saturday, October 10 workshop "Survive and Thrive After Peak Oil: Creating Personal Plans for the Coming Decades" at the ASPO 2009 International Peak Oil Conference, October 10-13 in Denver, CO.

At the ASPO conference, I'll skip the mutual fund stuff altogether, and spend more time on the how-to's of stock-picking.

Disclosure: None.

Comments

[Franck Pris...:]

Tom,

I could not agree more. In 2005, I was asked by the French bank Palatine to set up the strategy and manage a long only Clean Energy fund, which was launched as Palatine Energies Renouvelables. My objective was to differentiate the fund from its peers out there, of which there were just a few which I called "sticks of dynamite". We did, outpreforming the MSCI Global benchmark by a mile - that is until the Great Leveler of 2008 hit - and more importantly, with a beta of around 1, and much less relative to our peers. The bank was bought out and I stopped co-managing the fund in June.

There is a way to invest in the theme in an institutional fashion. It requires disciplined diversification, a wide enough stock universe, an understanding of the viability of the technologies - if they were not bleeding edge for most, we wouldn't have the problem in the first place - and a bit of luck. If you're interested, let me know.

Aug 27 08:58 AM

[La Marque:]

Tom, I appreciate the comparison info. I am happy enough owning
GEX right now.. This info will be very useful going forward.

Aug 27 09:55 AM

[indefinitelee:]

i don't see how the mere number of etfs or mutual funds represents a bubble. How many dollars are represented by those ~30 funds? Do a small number of funds hold most of those assets? Are they over-valued in some way?

Aug 27 10:15 AM

[Alan Young:]

Thanks for a very insightful article.
What is striking in the graph is the utter dearth of exposure to batteries, energy storage, and the grid.
An ETF to cover this sector sure would help; it's too diversified to easily cover by stock-picking.

Aug 27 12:27 PM

[quick:]

I don't think that graph accurately represents a bubble, because it doesn't represent money, it's just the number of ETFs and mutual funds devoted to renewable energy. And I'd say under 20 total is still a pretty small number. Some of these ETFs are pretty small (net assets in the funds less than $100M) and not very liquid. If you're trying to show that not all of these funds will survive, well yea, I agree with you there. But if you're trying to show that the renewable energy sector is somehow overvalued, I don't think that chart works at all. Show me something with the amount of $$ in these renewable energy funds or something, not just the number of funds.

Aug 27 06:35 PM

[Stefan Sida...:]

A few years ago there wasn't a decent ETF in this sector. I remember my choice being a US only ETF or an internationally diversified fund with very high load (NALFX). It was impossible to get wind exposure, they are all foreign companies. Starting with PBD, the ETFs with global diversification have really opened this investing opportunity to retail investors.
While you can't draw a direct line between the number of ETFs and the existence of a bubble, it definitely begs for more research.

Alan Young makes a good point. The large scale introduction of renewables is dependent on a grid that can handle them and one of the biggest technological hurdle is energy storage and the ability for the grid to quickly adapt random changes in supply.

Thanks for the article.

Sep 25 10:20 AM