Alternative Energy ETFs and Tracking Accuracy

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 |  Includes: PBD, PBW, TAN
by: The Green Investor

Most of us have come to assume that ETFs do a pretty good job of tracking their indexes, and we do not worry much about it. Maybe we should.

According to The Wall Street Journal, a recent study from Morgan Stanley shows that in 2009 ETFs more than doubled their tracking error rates over 2008, to an average miss of 1.25% versus 0.52% a year earlier. While the average error doubled, it is still so small that it made us wonder if it could possibly be that small for alternative energy ETFs.

In our article entitled, “A Guide to Investing with Green ETFs”, we identified a dozen alternative energy ETFs covering various angles of the market. For our accuracy test we picked three Index/ETF pairs representing the broader U.S. markets, the broader global markets, and the specialized solar segment. The 2009 returns and tracking errors are as follows:

Ticker

Name

2009
Return

Tracking
Error

INDEX

ECO

WilderHill Clean Energy Index

28.94%

0.07%

ETF

PBW

PowerShares Wilder Clean Energy Portfolio

29.01%

INDEX

NEX

WilderHill New Energy Global Index

40.91%

-3.10%

ETF

PBD

PowerShares Global Clean Energy Portfolio

37.81%

INDEX

SUNIDX

MAC Solar Energy Index

22.38%

-5.50%

ETF

TAN

Claymore/MAC Global Solar Energy Index ETF

16.88%

Click to enlarge

The PBW fund fared best by outperforming its index by some 0.07%. The shortfall of the global funds is getting into meaningful numbers. It is worth pointing out that these numbers use the NAVs calculated by the fund companies and that looking at the actual price performance of the ETFs can show some wider tracking errors. For example, the 2009 price performance of PBD was actually 31.80%, versus 40.91% for the index it tracks. We know that over time the tracking errors could go in both directions, but the magnitude of these misses makes us wonder what some of these funds actually invest in, apparently not in the stocks that constitute the indexes.

When it comes down to alternative energy investments, these findings reinforce our preference for selecting and trading individual stocks over ETFs attempting to mimic indexes. For those who prefer to stick with the expediency and simplicity of ETFs, buyer beware!

Disclosure: No positions.