Alternative Energy ETFs’ Wild Solar Powered Ride

The last twelve months have turned out to be a wild ride for investors in alternative energy ETFs. Many alternative energy ETFs reached record highs late last year before getting caught in the overall stock market weakness that has occurred over the past few months. Energy security issues and global warming have prompted investments in alternative energy and it is important to realize that investment in alternative energy is for the long term. There are now several alternative energy ETFs to choose from. Not all alternative energy ETFs are the same. Alternative energy ETFs vary in size, performance, and holdings.

With net assets of $1.38 billion, PowerShares WilderHill Clean Energy (PBW) is the largest and oldest alternative energy ETF. Three other popular alternative energy ETFs are newer and considerably smaller in size. PowerShares Global Clean Energy (PBD) has net assets of $155 million. First Trust Nasdaq Clean Edge U.S. Liquid Series (QCLN) has net assets of $40.2 million while Market Vectors Global Alternative Energy (GEX) has net assets of $265.2 million.

Over the past 12 months, PBW has increased by 3.76% but year to date it is down 29.22%. Being largest in size and having the longest trading history means that PBW is often used as a benchmark for other ETFs in the alternative energy sector. PBD which has not traded for a full 12 months is down 19.34% for the year to date. Like PBD, QCLN has not yet traded for a full 12 months and is down 30.45% for the year to date. GEX is down 20.03% to date in 2008. Even thought it did not trade for the full calendar year of 2007, First Trust Nasdaq Clean Edge was last year’s big winner with a 65% return.

Not all alternative energy ETFs are equal in performance and some of the differences can be traced to their respective holdings.

QCLN, for example, has ten stocks that make up 56% of the total assets. Three of the top ten holdings are well known solar companies. First Solar Inc. (FSLR), Sunpower Corporation (SPWR), and Suntech Power (STP) account for 8.9%, 4.4%, and 5.0% respectively of the fund’s total assets.

PBW, in comparison, has ten stocks that account for 40% of the total assets. First Solar accounts for 3.4% of the total assets. PBD is even more diversified, with the top ten holdings comprising 24.4% of the total assets. Neither FSLR, SPWR, nor STP is listed in the top ten holdings.

GEX is the least diverse ETF, with just ten companies making up 64.9% of the total assets. First Solar makes up 7.7% of the total assets. First Solar is currently up 11.6% on the year to date.

You can learn a lot about an ETF from looking at its top ten holdings. Last year’s big winner, First Trust Nasdaq Clean Edge, is relatively small in terms of total assets but heavily concentrated towards solar power. Given First Solar’s incredible 795% rise in stock price in 2007, it is no wonder that alternative energy ETFs heavily oriented towards solar power did well. ETFs oriented toward just one sector or group of stocks do well when these stocks are in favor and rise rapidly in price.

On the downside, however, narrow focus also means less diversification of risk. The solar industry is risky because so much of what goes on in the industry depends less on economic market forces and more on government regulation. For the time being, solar is providing investors with a mostly sunny but some times wild ride.

Disclosure: Author is long PBW

Comments

[llsolar:]

don't mean to go too short term here, but...last two days have made me nervous reminding me a bit of the January-March horror show for solars. I am wondering if we may be in for a correction and, if so, how big? As well, if oil goes down to let's say $90 in the medium term, how big a drag might that be on solars? That being said, long live SOL and TSL! (and throw in JASO and CSIQ for good measure)

2008 Apr 24 06:04 PM

[richjoy:]

I am looking for all I can learn on solar stocks/ETFs. What I found here, seems to have come from Morningstar.

2008 Apr 25 09:23 AM

[xgreen:]

can you recomend some ETF's that are more focused on wind and geo-thermal? what about some ETF's that invest in companies who are creating more efficient technologies for lighting?

2008 Apr 25 09:54 AM

[Leo S:]

I am buying GAAEX - a no-load mutual fund. Like the entire sector, it did great in 2007, since tanked, but is up the past 90 days. It has done better than PBW over the last 3 months.

2008 Apr 25 01:56 PM