Green ETFs: Super Volatile or Supercharged?

If you accept Morningstar ratings and commentary at face value, you'll be quick to dismiss "focused" exchange-traded funds. For example, a writer for the ubiquitous fund rating service recently chided, "PowerShares WilderHill Clean Energy (PBW) has roughly 90% of assets stashed in the hardware, industrial-materials, and utilities sectors alone."

So? By definition, a sector fund is supposed to be concentrated. And in this case, it concentrates in clean energy.

If one is going to levy criticism on green funds, one should probably prepare something a bit more substantive. For example, in a previous column, I discussed advantages that "old energy" may have over "alt energy." I've also slammed ETF providers for creating an excessive number of "green-n-clean" ETFs.

Yet Morningstar has been unnecessarily harsh on ETFs like the Claymore S&P Global Water Fund (CGW) and the Market Vectors Environmental Services Fund (EVX). The fund ranker complains that these ETFs are too focused on small companies in narrow sectors. Yet, paradoxically, Morningstar still serves 5-star, breakfast-of-champions approval for ultra-concentrated agriculture funds like CGM Focus.

Are these ETFs too volatile for their own good? Or might one of them play a supercharged supporting role for your portfolio like Manu Ginobli off of the San Antonio Spurs bench?

The Claymore S&P Global Water Fund seeks to replicate the collective performance of the 50 companies in the S&P Global Water Index. Companies in the index, for instance, might be involved in water supply, water utilities, waste water treatment, pipeline construction, water purification, well drilling, water testing, water treatment appliances, pumps and counting devices.

Clearly, the Claymore S&P Global Water Fund gives one easy access to 50 of the top water companies around the globe. It follows that, investors who believe that the demand for water can only grow, CGW may be a viable addition to one's portfolio. (And it hasn't been significantly more volatile than the S&P 500 SPDR SPY!)

In contrast, the Market Vectors Environmental Services Fund is a bit more curious; that is, it only has exposure to 23 companies engaged in the management, removal and storage of consumer waste and industrial by-products.

(Granted, "the number 23" represents a rather small pool. Once again, though, let's recall how funds like Janus Twenty and CGM Focus built 5-star reputations on less than 25 companies.)

The Market Vectors Environmental Services Fund gained 17% in 2007. It's up a few percentage points in 2008. Moreover, the fund recently climbed back above its 200-day moving average, suggesting that EVX is experiencing an uptrend.

EVX has been a bit more volatile in price movement than the S&P 500. That may cause a few missed heartbeats.

More troublesome, however, is the 1.4% annual expense ratio. There's little reason for any ETF... let alone Environmental Services... to cost 100 basis points more than the average exchange-traded fund. Van Eck's decision to charge so much for their vehicle flies directly in the face of low cost indexing, one of the chief reasons to invest in ETFs!)

In all, I think EVX targets an attractive niche. Yet I am far from keen on the idea of paying 1.4% for a vehicle that doesn't significantly deviate in price direction from other "green funds." In particular, EVX seems to move in a similar direction to business services funds like the PowerShares Cleantech Fund (PZD).

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[User 137616]

I own the EVX and have been watching the PZD...your article really me decide what I need to do.........thanks alot.....sincerely, marcie beam