What Are They?
- Green ETFs hold a basket of alternative energy stocks or stocks of companies perceived to support energy production with lower environmental impact than fossil fuels produce.
Why & How To Use Them
- Green ETFs tend to be narrow, usually focused on alternative energy stocks. The lack of diversification makes them less suitable as a core holding for long term investors. Moreover, since alternative energy stocks are often driven by sentiment and news, green ETFs may be significantly more volatile than broader sector funds.
- Long term investors can use green ETFs to supplement a core porfolio of index ETFs, "tilting" the portfolio to alternative energy stocks in the hope that those stocks will outperform the broader market in the long term.
- Green ETFs are also attractive to short term traders, as they tend to be volatile but less risky than individual stocks.
What to Look Out For
- Green ETFs tend to have higher expense ratios than broader US index ETFs. Check the annual expense ratios before you buy.
- There are dramatic differences between the holdings of the green ETFs, leading to dramatic differences in the ETFs' performance. See the "Further Reading" section below for more detail.
- For discussion of their differences between the green ETFs, see The Green Investor: Choosing An Alternative Energy ETF (Mick Weinstein), Tree Huggers Unite! A Survey of Cleantech ETFs (Richard Kang), PowerShares' New Alternative Energy ETFs (Richard Kang) and New Solar ETFs: Here Come the Suns (Hard Assets Investor).
- Christopher Holt asks 'Is There Alternative Beta in Alternative Energy ETFs?'
- For a more skeptical look at green ETFs, see Green ETFs: Good Cause Doesn't Always Produce Better Performance (Tom Lydon), Cleantech and Alt. Energy: The Next Tech Bubble? (Charles Morand), and Not All Is Green in Alt. Energy ETF Land (Murray Coleman).
- Other articles on alternative energy ETFs: PowerShares Goes Nuclear (Murray Coleman), Clean Energy ETFs are Volatile, but Hold Potential (Tim Plaehn).
- For a critique of narrow theme ETFs, see William Bernstein's Who Needs 'Em? The List of Obscure ETFs Grows.
This page is part of The Seeking Alpha ETF Selector which sorts ETFs by type, highlights how to use them and what to look out for, and provides links to articles that discuss key issues for investors.