One of the major issues facing our society today is global warming and the accompanying fear of slowly squandering the limited natural resources available on our planet. We all know that oil is a limited resource. But we also know that if we don’t find alternative sources of energy, the world as we know it today will no longer exist.
That’s why alternative energy ETFs are so tantalizing to think about. There is so much discussion about the older energy sources such as coal, oil and natural gas that have been moving our economy for decades. Climate change discussions as well as rising commodity prices have helped bring alternative or renewable energy discussions to the front table.
The problem of course is that these new energy sources are often much more expensive and while that may change in the future, it is not clear how much time it will take. Another important factor when it comes to energy is government regulation. Other sectors are relatively free of government interference as long as they obey the basic laws. Governments have put their money where their policy is by granting huge financial incentives to alternative energy companies but with financial support comes regulations. Energy, including alternative energy, is seen as something with national security implications and is keenly under the radar of most governments. Since there's no way to know how the governments would react in the future, it adds a good deal of risk to any alternative energy investment.
As an investment perspective, recently, with the drastic drop in oil prices, alternative energy funds have suffered. It should not come as a surprise that coal related stocks and ETFs have continued to be one of the best performing sectors this year. Considering that alternative energy is yet to produce sensible economics, oil and coal continue to be cheaper to use than alternative energy. Another basic disadvantage that holds true for most of the alternative energies is that their supplies are mostly dependent on nature and thus are not constant.
- Hydrogen- The cheapest way to produce hydrogen for fuel cells is by using natural gas, a non-renewable resource that creates greenhouse gases when burned. Hydrogen can also be made from water, but this is expensive and widespread adoption of this practice could threaten the world's freshwater reserves.
- Solar Energy- Highly refined silicon panels may never be as inexpensive or productive as fossil fuels. Without continued government subsidies, solar could die.
- Tidal Energy- Only 40 sites on Earth offer tidal ranges greater than 16 feet, the minimum to make electricity. And those will work for only 10 hours a day.
- Wind Energy- Where wind is, people aren't. No one has come up with economical transmission and storage solutions for this far flung, intermittent power supply.
However there is no denying the fact that eventually there will be some big winners in the alternative energy field but as of now there is a deep uncertainty as to how much time it will take to get alternative energy in the driver’s seat. The advantages of using alternative energy will be only be realized when people are forced to make the changes to their lifestyles and businesses.
Investment Options in Alternative Energy
Alternative energy ETFs come in two basic forms: those that invest in a wide swathe and those that invest in a concentrated area of the alternative energy market.
Clean Energy ETFs
PowerShares WilderHill Clean Energy (PBW): PBW tracks the WilderHill Clean Energy Index, a benchmark that tracks companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy. It holds 53 securities and is heavily exposed to companies in the electrical equipment sector.
PBW Top Ten Holdings
- Rubicon Technology, Inc. (RBCN): 3.53%
- Universal Display Corporation (PANL): 3.46%
- ReneSola Ltd (SOL): 2.84%
- Ormat Technologies, Inc. (ORA): 2.83%
- Quanta Services, Inc. (PWR): 2.76%
- JA Solar Holdings Co., ADR ADR (JASO): 2.67%
- Zoltek Companies, Inc. (ZOLT): 2.67%
- First Solar, Inc. (FSLR): 2.65%
- GT Solar International, Inc. (SOLR): 2.63%
- STR Holdings, Inc. (STRI): 2.53%
Expense Ratio: 0.60%
PowerShares Glbl Clean Enrgy Port (PBD): PBD consists of 88 securities and has nearly one-third of its exposure to U.S. firms, the largest single country allocation. Additionally, the fund is heavy on mid and small cap securities; just 14% of the assets are classified as large cap firms.
PBD Top Ten Holdings
- American Superconductor Corporation (AMSC): 2.64%
- China High Speed Transmission Equipment Group Co., Ltd. (00658): 2.54%
- Hansen Transmissions International NV (HSN): 2.27%
- Vestas Wind Systems A/S (VWS): 2.12%
- Novozymes (NZYM B): 2.02%
- Ormat Technologies, Inc. (ORA): 2.00%
- Energy Development (EDC) Corporation: 1.95%
- Covanta Holding Corporation (CVA): 1.92%
- Cosan S.A. Industria e Comercio (CSAN3): 1.92%
- China WindPower Group Ltd. (00182): 1.92%
Expense Ratio: 0.75%
WilderHill Clean Energy Index (ECO): The WilderHill Clean Energy Index (ECO) is an index that defines and tracks the Clean Energy sector: specifically, businesses that stand to benefit substantially from a societal transition toward use of cleaner energy and conservation. Stocks and sector weightings within the ECO Index are based on their significance for clean energy, technological influence and relevance to preventing pollution in the first place. The WilderHill Clean Energy Index (ECO) is a index that tracks the clean energy sector and the PowerShares Clean Energy Portfolio (PBW) is the investment vehicle that replicates it.
PowerShares Cleantech Portfolio (PZD): PZD consists of 78 firms which focus on knowledge-based products or services that improve operation, performance, productivity, or efficiency, while reducing costs, inputs, energy consumption, waste, or pollution.
PZD Top Ten Holdings
- Siemens AG (SIE): 2.75%
- Roper Industries, Inc. (ROP): 2.74%
- Ansys, Inc. (ANSS): 2.72%
- Autodesk, Inc. (ADSK): 2.64%
- Novozymes (NZYM B): 2.63%
- Corning Inc. (GLW): 2.63%
- Schneider Electric (SU): 2.60%
- Johnson Controls, Inc. (JCI): 2.60%
- First Solar, Inc. (FSLR): 2.59%
- Cree, Inc. (CREE): 2.53%
Expense Ratio: 0.60%
iShares S&P Global Clean Energy Index Fd (ICLN): This iShares fund allocates its holdings to a wide variety of alternative energy sources. Besides solar and wind, the fund also invests in firms that produce biomass and ethanol and geothermal producers. The top sector is electrical equipment, which makes up about 53% of assets.
ICLN Top Ten Holdings
- Energy Company of Parana ADR (ELP): 6.55%
- National Electricity Company of Chile, Inc. ADR (EOC): 6.29%
- Energy Company of Minas Gerais ADR (CIG): 6.13%
- First Solar, Inc. (FSLR): 5.90%
- China Longyuan Power Group Corp Ltd (OTCPK:CLPXF): 5.01%
- Verbund AG (VER): 4.89%
- Iberdrola Energias Renovables SA (IBR): 4.77%
- EDP Renovaveis SA (EDPR): 4.74%
- Vestas Wind Systems A/S (VWS): 4.52%
- Covanta Holding Corporation (CVA): 4.26%
Expense Ratio: 0.48%
First Trust NASDAQ Clean Edge Green Energy Fund (QCLN): The index is a modified market capitalization weighted index designed to track the performance of clean energy companies that are publicly traded in the United States and includes companies engaged in manufacturing, development, distribution and installation of emerging clean-energy technologies including, but not limited to, solar photovoltaics, biofuels and advanced batteries.
QCLN Top Ten Holdings
- First Solar, Inc. (FSLR): 8.60%
- Linear Technology (LLTC): 8.34%
- Cree, Inc. (CREE): 7.93%
- National Semiconductor (NSM): 5.73%
- ON Semiconductor Corporation (ONNN): 5.37%
- AVX Corporation (AVX): 4.17%
- Itron Inc. (ITRI): 4.03%
- MEMC Electronic Materials (WFR): 3.80%
- Baldor Electric Company (BEZ): 2.94%
- Hexcel Corporation (HXL): 2.72%
Expense Ratio: 0.60%
Market Vectors Solar Energy (KWT): This ETF focuses on mid cap securities, which make up more than half of the fund’s total assets. KWT’s top holdings are Renewable Energy Corp. and MEMC Electronic Materials, which combine to make up 22.6% of the fund’s total assets.
KWT Top Ten Holdings
- First Solar, Inc. (FSLR): 12.76%
- MEMC Electronic Materials (WFR): 9.37%
- Suntech Power Holdings Co., Ltd. ADR (STP): 8.48%
- Trina Solar Limited ADR (TSL): 8.27%
- SMA Solar Technology AG (S92): 4.80%
- Yingli Green Energy Holding Company, Ltd. (YGE): 4.62%
- SolarWorld AG (SWV): 4.52%
- Gintech Energy Corporation (3514): 4.38%
- JA Solar Holdings Co., ADR ADR (JASO): 3.89%
- SunPower Corporation (SPWRA): 3.54%
Expense Ratio: 0.65%
Claymore/MAC Global Solar Index (TAN): TAN offers investors a greater level of exposure to small cap securities by investing slightly more than two-thirds of its total assets in small cap firms. Its largest holding is First Solar, which makes up 10% of the fund’s total assets.
TAN Top Ten Holdings
- First Solar, Inc. (FSLR): 9.93%
- Meyer Burger Technology AG (MBTN): 5.31%
- Trina Solar Limited ADR (TSL): 5.22%
- Suntech Power Holdings Co., Ltd. ADR (STP): 4.94%
- MEMC Electronic Materials (WFR): 4.89%
- Renewable Energy Corporation ASA (REC): 4.74%
- SolarWorld AG (SWV): 4.68%
- Yingli Green Energy Holding Company, Ltd. (YGE): 4.68%
- SMA Solar Technology AG (S92): 4.57%
- SunPower Corporation (SPWRA): 3.74%
Expense Ratio: 0.65%
First Trust Global Wind Energy (FAN): FAN offers investors global exposure to the wind industry, allocating 26.2% of its assets to Spanish equities, 16.3% to the U.S. and 14.9% to Germany.
FAN Top Ten Holdings
- Vestas Wind Systems A/S (VWS): 7.76%
- Iberdrola Energias Renovables SA (IBR): 6.70%
- EDP Renovaveis SA (EDPR): 6.53%
- REpower Systems AG (RPW): 6.52%
- Hansen Transmissions International NV (HSN): 6.18%
- Gamesa Corporacion Tecnologica, S.A. (GAM): 4.55%
- Nordex AG (NDX1): 3.69%
- Infigen Energy (IFN): 3.69%
- Japan Wind Development Co Ltd: 3.21%
- PNE Wind AG (PNE3): 2.31%
Expense Ratio: 0.60%
PowerShares Global Wind Energy PortfoETF(PWND): This ETF also offers investors global exposure, and is diversified across market capitalization levels with nearly equal allocations to large, mid, and small cap securities.
PWND Top Ten Holdings
- Vestas Wind Systems A/S (VWS): 11.81%
- Iberdrola Energias Renovables SA (IBR): 8.95%
- EDP Renovaveis SA (EDPR): 8.68%
- Edf Energies Nouvelles (EEN): 8.57%
- China High Speed Transmission Equipment Group Co., Ltd. (00658): 5.88%
- American Superconductor Corporation (AMSC): 5.33%
- Hansen Transmissions International NV (HSN): 4.35%
- China WindPower Group Ltd. (00182): 4.17%
- REpower Systems AG (RPW): 3.97%
- China Longyuan Power Group Corp Ltd (OTCPK:CLPXF): 3.83%
Expense Ratio: 0.75%
A Comparison Chart of Wind, Solar and Clean Energy Funds
The Future Trends of Alternative Energy
The alternative energy sector is undergoing a recovery after having absorbed the global recession and falling waterfall in the world price of crude. Earlier this year, very few alternative energy companies have been in the trough. Although these alternative energy companies have recovered from their low, their valuations are still well below the 52-week high. The growth of alternative energy companies is closely tied to the fortunes of the economy.
A World Bank report has suggested that six major East Asian economies will together need roughly $80 billion in investment in alternative energy sources per year in order to stabilize their greenhouse gas emissions by 2025. Since 2005, investment in clean energy increased by 230% to $162 billion in 2009.
Under the American Reinvestment and Recovery Act (ARRA) passed in February 2009, the U.S. Treasury Department has implemented a program to issue cash grants in lieu of investment tax credit for renewable energy projects. Asian governments, most notably China, have increased their financial support for solar projects. China is aiming at increasing its installed solar power capacity to 2GW by 2011 from 140MW capacity at the end of fiscal 2008.
Disclosure: No positions