The “clean energy” or “alternative energy” sector is usually defined to include renewable power sources such as solar power, wind power and geothermal power, as well as electricity sectors such as conservation, the smart grid, batteries and storage. This report will cover the broad clean energy ETFs that hold stocks from all of these various sectors in one fund.
PowerShares has four different funds in the broad clean energy space, accounting for a total of nearly $1 billion in assets under management, making it the largest ETF issuer in the space by far. Van Eck is the other main player in the broad clean energy ETF space with its Market Vectors Global Alternative Energy ETF (GEX). Here is a quick description of each fund.
PowerShares WilderHill Clean Energy Portfolio (PBW) – This fund, launched in March 2005, is the oldest fund in the sector and currently has $560 million in assets under management. The fund is based on the WilderHill Clean Energy Index (ECO). The fund holds 57 U.S.-listed stocks and is based on a modified equal-weighted index. The index assigns weights to clean energy categories and then equally weights the stocks within those categories. The categories are as follows: Renewable Energy Harvesting (solar, wind, geothermal) (24% sector weight), Power Delivery & Conservation (28%), Energy Conversion (20%), Energy Storage (18%), Cleaner Fuels (5%). The fund has an expense fee of 0.60%.
PowerShares Global Clean Energy Portfolio (PBD) – This fund, launched in June 2007, has $145 million in assets under management. The fund is based on the WilderHill New Energy Global Innovation Index (NEX), which is a modified equal-weighted index that holds 100 globally-listed stocks. The fund is different from PBW in that more than half of the stocks held are listed on exchanges outside the U.S., whereas PBW holds only U.S.-listed stocks. The index web site lists the following sector weights: Energy Efficiency 27.55%, Solar 24.63%, Wind 19.58%, Biofuels & Biomass 10.52%, Renewables-Other (Geothermal, Marine, Hydroelectric) 9.29%, Power Storage 7.01%, Energy Conversion 1.43%. The weighting methodology involves assigning weights to each sub-sector. Then, within each subsector, the stock components are divided into large and small cap stocks and large components are assigned 3-1/2 times of the weight of small components. The fund has an expense fee of 0.75%.
PowerShares Cleantech Portfolio (PZD) – This fund, launched in October 2006, has $145 million in assets under management. The fund, based on the Cleantech Index, is a modified equally-weighted index that currently holds 72 globally-listed stocks. The current sector allocation for the index, according to the index provider’s literature, is as follows: Energy: Generation & Equipment 27.7%, Energy: Clean Fuels & Energy Storage 3.6%, Energy Transmission: Grid-level power controls, hardware, etc. 6.4%, Local Energy: Controls, efficiency products & services 13.5%, Water 10.7%, Environmental Quality 5.9%, Industrial: Clean & efficient production 14.7%, Advanced Materials 6.5%, Transport Technology 7.8%, and Agriculture & Nutrition 3.3%. This fund is broader than PBD or PBW because it includes such sectors as Water, Environmental Quality, Transport Technology, and Agriculture and Nutrition. The fund has a relatively low weight on solar of only about 10% and even less on wind. The fund has an expense fee of 0.60%.
PowerShares WilderHill Progressive Energy Portfolio (PUW) – This fund, launched in October 2006, has only $60 million in assets under management. The fund is based on the WilderHill Progressive Energy Index (WHPRO), which is focused on transitional technologies that “can serve as an energy bridge improving near-term use of fossil fuel resources by progressively reducing carbon and other pollution.” The fund holds 53 U.S.-listed stocks. The fund has an expense fee of 0.60%.
Market Vectors Global Alternative Energy ETF (GEX) – This fund, launched in May 2007, has $134 million in assets under management. The fund is based on the Ardour Global Index. This fund has only 31 globally-listed stocks, which is less than half of its competitors. According to our calculations, the fund has about a 30% weight on solar and 23% on wind, which is higher than the other funds in its class. The index uses a modified market-cap weighting scheme that puts a particularly large weight on First Solar (9.75%), Cree (9.46%), and Vestas Wind (8.50%). The fund has a net expense fee of 0.62%.
There are three other ETFs in the area of broad clean energy, but we will not discuss these in detail because their assets under management are low:
- iShares S&P Global Clean Energy Index Fund (ICLN) -$50 million in assets under management.
- First Trust NASDAQ Clean Edge US Liquid Series Index Fund (QCLN) - $37 million in assets under management
- ELEMENTS Global Warming ETN (GWO) - $2 million in assets under management.
Our choice for the "Best in Class ETF" in the Clean Energy sector ETF is the PowerShares Global Clean Energy Portfolio (PBD). The PowerShares WilderHill Clean Energy Portfolio (PBW) has a much large amount of assets under management, but we chose PBD because (1) it has a better performance record than PBW (see Figure 1), and (2) PBD invests in globally-listed stocks as opposed to PBW, which invests in only U.S.-listed stocks. The clean energy industry is truly global in scope and the U.S. in general has lagged behind Europe and Asia in the clean energy business. We therefore favor global clean energy ETF funds that hold not only U.S-listed companies, but also hold clean energy companies listed in Europe and Asia.
Figure 1: Comparison of Broad Clean Energy and Cleantech ETFs
We like our choice of PBD more than the Market Vectors Alternative Energy ETF (GEX) because PBD holds 57 stocks and is more diversified than GEX, which holds only 31 stocks. In addition, we like PBD’s modified equal weighting scheme, as opposed to the modified market-cap weighting scheme used by GEX that causes the top stocks in GEX to have relatively heavy component weights of 8-9%, which is a negative from the standpoint of higher single-company risk.
We do not find the PowerShares WilderHill Progressive Energy Portfolio (PUW) to be attractive because (1) PUW has low assets under management, (2) PUW has only U.S.-listed stocks, and (3) PUW’s focus on the transitional theme of “improving the near-term use of fossil fuel resources” means that the fund holds some stocks that we don’t believe should be held in a clean energy fund such as companies related to fossil fuels and nuclear power.
While PBD is our choice for the Clean Energy sector, we are also choosing PowerShares Cleantech Portfolio (PZD) as the Best in Class in the category of “Cleantech,” which we believe is sufficiently different from “Clean Energy” to justify a separate category and a separate pick. As seen in Figure 1, PZD in the past two years has outperformed the Clean Energy ETFs of PBD and PBW. PZD has a low weight on the solar and wind sectors and instead invests in a broad range of technologies including energy efficiency and storage, water, pollution controls, and others. Investors who might be concerned about the PZD’s light weighting in solar and wind could separately invest in the single-sector solar and wind ETFs to gain the desired exposure to those sectors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.