Global Regulation Trend Favors PowerShares Global Clean Energy

The U.N. Climate Change Panel last year proposed a goal of reducing greenhouse gas emissions 50% by 2050—a reduction believed to forestall temperature increases large enough to cause widespread famines, droughts, species loss and coastal flooding. Achieving that goal would cost more than $45 trillion, according to a report released last week by the International Energy Agency. The job would require massive investments in alternative energies such as wind, as well as construction of around 1,400 nuclear power plants, the report claims. Assuming 3.3% global economic growth between 2010 and 2050, the IEA projects that it would take the equivalent of 1.1% of the world’s total GDP to achieve the U.N.’s goal.

If governments and corporations around the world take the goal seriously, the alternative energy sector can expect much of that $45 trillion to be headed its way. PowerShares Global Clean Energy ETF (PBD), which shot up 26 positions on the PowerShares Momentum Tracker in the last two and a half months, offers one of the most expansive takes on clean energy investing. The fund’s portfolio recently included holdings from every continent except Antarctica, with around 20 countries represented altogether. About 28% of assets were invested in U.S. stocks and 19% in German shares, while stocks in Spain, China, France, Denmark and Japan each took up between 5% and 10% of assets.

The stocks in PBD’s portfolio are very different from those found in conventional energy ETFs. In fact only about 2% of the fund’s assets recently were invested in stocks in the energy sector, according to PowerShares. Shares of firms involved in the wind power, solar power, energy storage and biofuels industries make up the bulk of PBD’s portfolio, and many of those companies are more associated with the industrials, information technology or utilities sector than energy.

Recent top holding Energy Conversion Devices (ENER), a manufacturer of rooftop solar panels and the nickel hydride batteries used in hybrid cars, typifies the kinds of stocks in which PBD invests. Energy Conversion was primarily focused on research and development until recently, but now the company is trying to transform itself so that it can effectively manufacture and distribute the fruits of its R&D machine. The firm’s fiscal third quarter report, released last month, suggests the transition is moving along smoothly: Its solar business saw a 30% increase in gross margin on sales, as investments in production capacity led to greater efficiency. The company’s stock rose 90% for the year through June 6. Energy Conversion represents the only U.S.-based stock in PBD’s recent top five—the others are European and are primarily involved in the wind power industry.

PBD’s international breadth might serve investors well in the near future. For one thing, many of the world’s most innovative and fastest-growing alternative energy firms are overseas. Their stocks fly under the radar of clean energy ETFs that invest solely in stocks traded in U.S. markets.

Moreover, foreign governments have pushed investments in clean power more aggressively than the U.S. has. In fact, on the same day the IEA released its report, U.S. senators killed a global warming bill that would have required polluters to purchase permits to produce carbon emissions. Things are likely to change no matter who ends up in the White House next year, but for now it seems unlikely that the U.S. government will help spur any substantial increase in domestic spending on clean energies. And if the U.S. economy continues to drag, PBD’s exposure to a range of international markets may help offset losses from domestic stocks.

To understand what makes PBD distinct from other clean energy ETFs, it helps to compare the fund with PowerShares Wilderhill Clean Energy (PBW)—a similar but much more concentrated and narrowly focused fund. PBD’s portfolio recently included 88 holdings, with about a quarter of its assets invested in its top 10 stocks. Meanwhile, PBW’s portfolio included only 47 holdings, and its top 10 accounted for about 36% of assets.

The funds also differ in the kinds of stocks in which they invest. PowerShares recently classified about 55% of PBD’s portfolio in the industrials sector and around 15% in the information technology sector. PBW had only a third of its assets in industrials and almost another third in IT.

The most important difference between the two funds is geographic. PBD is truly global, while PBW invests only in foreign stocks that trade as ADRs on U.S. markets. As a result, PBW recently held only about a quarter of its assets in foreign stocks, compared to PBD’s 70%.

So far in 2008, PBD’s approach to clean energy has fared better than PBW’s. Both funds took massive dives in January, but by June 6, PBD was down only about 8% for the year while PBW had fallen more than 20%. The discrepancy between their performances caused PBD to be ranked 30 spots higher than PBW on the PowerShares Momentum Tracker Table last week.

This week will mark the one-year anniversary of PBD’s inception, so the fund still has little history with which to judge it by. One thing that appears certain, however, is that this fund holds the potential for extreme volatility. PBD offers exposure to dozens of up-and-coming clean energy firms that appear to hold great growth potential. But the future of clean energy is likely to be shaped by unpredictable political, environmental and technological developments—so investors would be wise to take a cautious approach.

Comments

[floorboard:]

Global Warming is not science. It's politics of the socialist kind. And religion of the kind that says the earth is our mother. Sizing up to be one of histories biggest hoaz.
The earth's temperature changes in cycles. That is the science. Man is not causing it nor going to stop it.
Private ownership of property is the cornerstone of freedom and independence. Global warming is the socialist device for ending at that.

2008 Jun 13 09:01 PM

[me3tv:]

Floorboard is right. But religious trends tend to gain traction and stick for thousands of years. Global Warming, socialistic redistribution of energy and other resources. They have the winning team on their side (about 95 pct of the UN) and probably is a good idea to bet on them.

2008 Jun 14 09:29 AM

[bluesmoke:]

I hope you two live on high ground, have flood or catasrophy insurance.

2008 Jun 14 10:51 AM

[Big D:]

Global warming is just hype.... When conditions are right there is a lot of profit in alternative energy. I am looking out my window here in Texas and can see 80 turbines spinning in the wind. Talk about money from nothing.... The more government gets involved, the more red tape, and the smaller the profit margins. I wish the government would quit subsidizing all energy and let the most efficient generators win market share. These companies PBD owns would then truly rocket.

2008 Jun 14 11:35 AM

[nakedjaybird:]

Amen, and Amen.

So wonderful it would be if responsible capitalists would take over the alternative energy industry and we could bury all the regulators, politicians, greenies, Democrats and other social welfare take-it-from-doers-to-... sorts.

However, we have to let them think they have a part in all this or else they will fight it, reject it, defeat it using all deceitful ways possible to stop real inginuity and progress, just as in ways past. Well proven.

2008 Jun 14 02:27 PM

[nakedjaybird:]

However, here's and ALTERNATIVE thought:

How about the RESPONSIBLE thumbing their nose at all those we wish would cease, desist and/or go away, from regulators, false theorists, propogandants, etc., all the way through the welfare scoffers; HOW ABOUT TAKING RESPONSIBLITY AND PROVIDING REAL LEADERSHIP telling them how it's going to be, and then do it as true, responsible capitalists.

And true to form, the responsible capitalists would inherently take care of the rest of wannabes, those wanting a handout or living on our tax dollar, by providing them real productive jobs; real jobs for unnecessary politicians, regulators, all lobbiests (no more persuasion required), to those saying there are no jobs or just don't want to work - and in the process tell the UN to meet on someone else's turf if they want to stick to their worldview and their friends that adhere to that abhorent worldview.

2008 Jun 14 02:48 PM

[rw mac:]

Doubt if any of yu flat earth types were even old enuf to own a care and wait in gas lines for hours. So since 73 what have all yu cap... types done to deliver reasonable energy prices. Why arent there nat gas pumps at filling stations since there is more nat gas then oil. No one is denying climte cycles its the multiplier effect that is of concern but I guess yu all are waiting for the next ice age. I thought this was an investmetn site

2008 Jun 14 11:53 PM

[nakedjaybird:]

Well rw mac, I'm not sure you're deserving of a response, but let me give you a small spoonful.

Some of us were trying to get more nuclear plants put in place since the 70's, but greenies et.al who wouldn't ever get the message until they threw the lightswithch on some night and found there was no power, got in the way.

Even more selfish ilk for big cars and lots of horsepower and lot's of freedom would not ever swing for the small car, much less the new batteries and electric vehicles with hockey-puck power semi-conductors as advanced controllers went at the time during the 60's and early 70's. Of course, we concluded at the time that commuters were not going to swing with a power limited, range limited fully electric vehicle. It was going to take a hybrid. Which 40 years later we now have. We can blame Detroit and Houston for big gas hogs - they deserve some of it, as do their lobbiests, and most of all the poor leadership that bought into the con and power grab, of many sorts. We forget of course, that Europe went for steel rails and small cars and electric cars. Smart.

However, folks here at home wouldn't give up their freedom for steel-wheeled rail transit again, or now, even rubber-wheeled electrified trolleys within the major congested cities. They couldn't, wouldn't, go for the proof of the like of Toronto's transit system which went nowhere at the time, but soon showed that if you build it, they will come. Many transit systmems proved this. We were, are, a selfish folk; not unlike dumb sheep. And hopeless without good LEADERSHIP.

We could have gone for amohphous metal transformers eliminating the losses of those on the poles, but replacement would be a program much beyond the changing out of the mercury-vapor whites, to the yellow sodium vapor, to the low pressure yellow you now which you probably don't recognize. You have no clue how many advancements could have been implemented. The ones we get at the consumer level are efficient lighting provided by utilities because of subsidies, energy efficient refrigerators for the poor, etc., by utility subsidized programs, not to mention the latest screw-in fluroencent bulbs. You ain's seen nothing yet baby, if you'd just get out of the way.

We were growing silicon ribbon in the 70's and making PV cells - a little behind where we are today. So, I suggest again, that we make all we can of the solar today and move on, aggressively. Overriding whatever resistance confronted. Just like the Manhattan Project or the Moon Program. It takes Leadership and ignoring folks like you.

2008 Jun 15 01:34 AM

[gashouse go...:]

>> Global Warming is not science. It's politics of the socialist kind. And religion of the kind that says the earth is our mother. Sizing up to be one of histories biggest hoaz.

Just like the ozone hole, second-hand smoke, tobacco smoke, and asbestos were hoaxes. Because the "X-is-junk-science" paid-for-by-industry crowd (and their unpaid followers) said so.

Not.

It's the same in every generation. There are:
(a) those who see the problem and push for solutions (some poor, some good)
(b) those who oppose doing anything, because it hurts their financial interest, and
(c) those who oppose the (a) group because the (b) group convinced them that the (a) group "has an agenda" beyond the agenda on the table. It's the "if we don't continue X, the bad guys win" argument.

2008 Jun 15 05:18 PM

[Roadstar Biker:]

Global warming is just another very real symptom of irresponsible pollution. And pollution is one way to shift the indirect costs associated with production and consumption off the private sector balance sheets. Problem is, those costs don't go away - they get borne by the public sector. And dealing with the costs of pollution (erosion of public health, productivity, availability of resources, etc) is growing burden bill that will eventually have to be paid.

If you have any doubts about this, just remember than in our life time we went from drinking tap water at pennies per gallon to drinking bottled water that's several times more expensive that gasoline. Don't buy into the fools argument that natural resources are infinitely available or that the environment has an infinite capacity to absorb our waste. There is not such thing as infinite availability or capacity.

The reason this article is even on this site is because smart folks realize that these issues are real and innovative solutions are needed now. The only real choice we have in this country is whether to increase public and private investment in alternative energy and catch up to the rest of the world, or continue down a path that guarantees that we'll by buy this technology from Germany, China and other nations.

2008 Jun 16 11:42 PM