Comparing Green Energy ETFs

Why ETFs?

Investors interested in a simple way to invest in a diverse basket of renewable energy and energy efficiency companies should consider Exchange Traded Funds (a.k.a. ETFs) first. Although green energy mutual funds will be more familiar to many investors, they come with costs that are difficult to justify in comparison. The following chart compares the annual expense ratio, or the percentage of fund assets which an investor pays every year for ETF fund management and expenses, compared to the expense ratio of one of the less expensive green energy mutual funds. (See my recent article comparing the green energy mutual funds.)

Defenders of mutual funds will note that the cost chart is a bit deceptive, since the Guinness Atkinson Alternative Energy Fund (GAAEX), which is shown, does not have a front-end load (i.e. there is no cost to make the initial investment), but an ETF purchaser must pay a brokerage commission to buy an ETF. While true, discount brokers have driven commissions so low that this is not a significant advantage. For instance, Zecco.com offers up to 10 free trades a month simply for having a $25K account balance. When there is no cost to buy or sell the ETF, the argument in favor of mutual funds evaporates.

Even if the ETF buyer did not qualify for free trades, the comparison still favors the ETFs. GAAEX has a minimum investment of $5000 for new investors. To invest that much in an ETF through a discount broker would cost $4.50 at Zecco, or $12.95 at Charles Schwab (one of the more expensive online brokers.) That's a 0.1% to 0.26% brokerage commission, meaning that if you were buying an ETF with one of the highest expense ratios (0.7%) at Schwab (+0.26%), you would have broken even after holding the ETF for only 3 months. Three months is a lot better payback than you're likely to get from solar panels!

Green Energy Sectors

The other advantage of Green Energy ETFs is sector selection. For the most part, the green energy ETFs are more narrowly focused on green energy than the mutual funds. This means that the ETFs are more volatile than the funds, rising more when the sector is doing well, but falling faster when it's doing badly.

Several of the mutual funds contain more than 10% of their portfolios in companies I would not classify as green energy at all. Among the ETFs, that is only true for the Forestry ETFs, CUT and WOOD, which I include as a way to get exposure to biomass, but which were not designed with clean energy or climate change in mind.

The sector breakdown chart below is a team effort. AltEnergyStocks.com editor Charles Morand provided the data on the five general ETFs (PBD, QCLN, GEX, ICLN, and PBW) when he took a look at these five in May. I have since extended his analysis to the sub-sector ETFs shown.

The Best Green ETFs

At the Rocky Mountain Institute, an energy "think and do" tank, they remind us that when we're greening our homes, we should eat our energy efficiency "vegetables" before having our renewable energy "dessert." The same is true for greening our portfolios.

The First Trust Nasdaq Clean Edge US Liquid Index Fund (QCLN) does the best job of giving our portfolio a healthy serving of energy efficiency, compared to both the other ETFs and the green mutual funds, and also has the second lowest expense ratio. If you are going to make a single investment in green energy, QCLN is my top pick.

For investors who qualify for free trades (see above), or investors putting enough into the sector that their commissions are just a fraction of a percent of the money invested, I suggest putting 80% of your money in QCLN and 20% in PTRP, the Powershares Global Progressive Transport Portfolio. For the most part, PTRP is also a serving of "vegetables" in the form of efficient transport, such as mass transit, hybrid vehicles, and even bicycles. Incidentally, bicycle dealers are having a record year even without a "cash for clunkers" scheme.

One or two trades, and a balanced green energy portfolio is yours at very low cost. While you are unlikely to out-perform the sector, unlike readers who bought my 10 Green Energy Stocks for 2009 at the start of the year, you're going to spend a lot less of your time doing it. The "10 stocks for 2009" investors had a lot less of an idea what they were getting.

DISCLOSURE: User sign-ups through Morningstar and Zecco links may earn referral fees for AltEnergyStocks.com. GAAEX is an advertiser on AltEnergyStocks.com.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Comments

[Alan Young:]

I'm scratching my head in confusion. I looked at the two biggest holdings in QCLN (LLTC 8.8% and ONNN 7.4% ). They are both big semiconductor manufacturers that serve a broad range of industries: telecom, home electronics, automobiles, and even military applications. Where's the "clean" in that? How much of their business is actually related to energy efficiency? JCI would make more sense.

Oct 14 04:33 AM

[isaac the t...:]

PTRP for me- you get a combination of emerging markets, infrastructure spending, carbon reduction, energy shortage themes all in one fairly diverse package.

Oct 14 11:20 AM

[danno:]

Dear Dr. Konrad:

If you look at the history of the holdings of some of these ETFs you'll realize that many of them have managers that don't know squat. Of course the managers are learning, but investors are paying them to learn at their own expense.

I don't know why you waste your ink on stuff like the cleanedge ETF, PBW, or PBD or many of their peers including the water funds. The strategy behind so many of these indexes looks like something my assembled by a kindergarten class. The funds grab deep in shallow industry niches and pick up a lot of crappy companies. Ever see a good publicly-traded fuel cell company? Funny, I haven't either. What exactly does this "index" track, anyhow?

Sometimes the indexes/ETFs pick companies that are anything but green (corn ethanol, "clean" coal, polluting coal plants anyone?), or companies that have tiny or exposure to the sector, demonstrates that they are either run by the incompetent for the incompetent/lazy investor or they are products just out to earn a quick buck. Obviously it's both of the above.

Did anyone out there ever notice that some of these indexes/ETFs have 6%, 10%, 15% or even 20% of their holdings in one stock? The arbs and hedge funds sure have. Ever see what happens when an index owns 100-270 days average trading volume of one stock when the quarterly/semiannual/a... rebalance happens? The arbs get several days to take the ETF investors to the cleaners. Maybe that's the cleanest thing about some of these funds.

Or the indexes hold stocks that are either super illiquid or trade on some exchange that's closed to foreigners investors (like us Gai-jin) so that the ETF can't actually track the index properly.

If you want narrow focus on green/clean energy pick up a solar or wind ETF for the short-term directional volatility. For the long run, investors and writers should do their home work and look at more than just fees.

Who's running these things ? Mickey, Goofy, or Pluto? People work really hard to save their money - so they should work just as hard to do their homework before then invest it. IMHO, I would recommend that you do much more extensive research before further pontification in this investment arena where quality products are few and far between.

Oct 14 06:34 PM

[Tom Konrad:]

Alan,
LLTC is known for efficient power conversion. How much is EE? I have no idea.


On Oct 14 04:33 AM Alan Young wrote:

> I'm scratching my head in confusion. I looked at the two biggest
> holdings in QCLN (LLTC 8.8% and ONNN 7.4% ). They are both big semiconductor
> manufacturers that serve a broad range of industries: telecom, home
> electronics, automobiles, and even military applications. Where's
> the "clean" in that? How much of their business is actually related
> to energy efficiency? JCI would make more sense.

Oct 16 09:47 PM

[Tom Konrad:]

Since these ETFs are index vehicles, you can expect crappy ad well as good companies. The main reasons I see for using ETFs are (1) you don't know more than the index managers, and don't have the time to spend. (2) you're not a large enough investor to invest in many of the foreign stocks in the indexes. This is especially true for the Wind and Clean Transport ETFs.

Nevertheless, I agree with you to the extent that I don't use the ETFs much myself... but then I spend a lot of time looking at individual stocks.


On Oct 14 06:34 PM danno wrote:

> Dear Dr. Konrad:
>
> If you look at the history of the holdings of some of these ETFs
> you'll realize that many of them have managers that don't know squat.
> Of course the managers are learning, but investors are paying them
> to learn at their own expense.
>
> I don't know why you waste your ink on stuff like the cleanedge ETF,
> PBW, or PBD or many of their peers including the water funds. The
> strategy behind so many of these indexes looks like something my
> assembled by a kindergarten class. The funds grab deep in shallow
> industry niches and pick up a lot of crappy companies. Ever see
> a good publicly-traded fuel cell company? Funny, I haven't either.
> What exactly does this "index" track, anyhow?
>
> Sometimes the indexes/ETFs pick companies that are anything but green
> (corn ethanol, "clean" coal, polluting coal plants anyone?), or companies
> that have tiny or exposure to the sector, demonstrates that they
> are either run by the incompetent for the incompetent/lazy investor
> or they are products just out to earn a quick buck. Obviously it's
> both of the above.
>
> Did anyone out there ever notice that some of these indexes/ETFs
> have 6%, 10%, 15% or even 20% of their holdings in one stock? The
> arbs and hedge funds sure have. Ever see what happens when an index
> owns 100-270 days average trading volume of one stock when the quarterly/semiannual/a...
> rebalance happens? The arbs get several days to take the ETF investors
> to the cleaners. Maybe that's the cleanest thing about some of these
> funds.
>
> Or the indexes hold stocks that are either super illiquid or trade
> on some exchange that's closed to foreigners investors (like us Gai-jin)
> so that the ETF can't actually track the index properly.
>
> If you want narrow focus on green/clean energy pick up a solar or
> wind ETF for the short-term directional volatility. For the long
> run, investors and writers should do their home work and look at
> more than just fees.
>
> Who's running these things ? Mickey, Goofy, or Pluto? People work
> really hard to save their money - so they should work just as hard
> to do their homework before then invest it. IMHO, I would recommend
> that you do much more extensive research before further pontification
> in this investment arena where quality products are few and far between.

Oct 16 09:51 PM

[danno:]

Actually, a good Index should have lousy companies in them, unless it is a sector or composite Index. When companies go bad, they are replaced. DJ 30 Industrials is a good example. Moreover, some of the better ETFs really offer is intelligent indexing that is most of the benefits of a mutual fund through and active selection process, but then passive index management to avoid market timing, capital gains distributions, and high fees. Since very fund managers (and only a tiny percentage of individual of investors) can beat the market with any regularity on a risk-adjusted basis (especially when you adjust for fees) it's very questionable, in my mind, that actively managed funds or individual investors are going to beat the indexes.

What smart investors can do, is:
a) Asset allocation and diversification
b) Pick the very best index-based funds.
c) only invest their "play money" in individual stocks, short-term investing, and other speculative stuff.

This is not fun to hear, very humbling, and doesn't sell books and TV shows, but it does allow investors to get good returns, and get on and enjoy the rest of their lives.

The one exception is when investors really know an industry or company very, very well. Then sometimes, they can beat the street, but that means a lot of work and specialized knowledge since there are often many insiders and street analysts who follow the same companies very closely and get paid to do it (so they spend many, many hours following the company, its peers, and meeting with management. That's a tough edge to beat. It doesn't always mean their advice is great since they often cannot publish what they really think.

Oct 19 09:00 AM

[danno:]

OOPS.

What I meant to say is that a good Index should NEVER have lousy companies unless...

Sorry about that.

On Oct 19 09:00 AM danno wrote:

> Actually, a good Index should have lousy companies in them, unless
> it is a sector or composite Index. When companies go bad, they are
> replaced. DJ 30 Industrials is a good example. Moreover, some of
> the better ETFs really offer is intelligent indexing that is most
> of the benefits of a mutual fund through and active selection process,
> but then passive index management to avoid market timing, capital
> gains distributions, and high fees. Since very fund managers (and
> only a tiny percentage of individual of investors) can beat the market
> with any regularity on a risk-adjusted basis (especially when you
> adjust for fees) it's very questionable, in my mind, that actively
> managed funds or individual investors are going to beat the indexes.
>
>
> What smart investors can do, is:
> a) Asset allocation and diversification
> b) Pick the very best index-based funds.
> c) only invest their "play money" in individual stocks, short-term
> investing, and other speculative stuff.
>
> This is not fun to hear, very humbling, and doesn't sell books and
> TV shows, but it does allow investors to get good returns, and get
> on and enjoy the rest of their lives.
>
> The one exception is when investors really know an industry or company
> very, very well. Then sometimes, they can beat the street, but that
> means a lot of work and specialized knowledge since there are often
> many insiders and street analysts who follow the same companies very
> closely and get paid to do it (so they spend many, many hours following
> the company, its peers, and meeting with management. That's a tough
> edge to beat. It doesn't always mean their advice is great since
> they often cannot publish what they really think.

Oct 19 09:02 AM