Expecting to Fly: First Trust Launches First Wind ETF

By Heather Bell

There's a new wind blowing in the energy sector,and First Trust Advisors is looking to get in on the action: The firm launched the first wind energy exchange-traded fund on the NYSE Arca today. The First Trust ISE Global Wind Energy Index Fund will trade under the symbol FAN and charge a net expense ratio of 0.60%.

There's a wide variety of alternative energy and clean energy ETFs currently available, and two funds covering the solar energy market were launched by Van Eck and Claymore just a few weeks ago. A wind energy ETF is just another variation on this theme and possibly another way to glean some benefit from soaring oil prices. With oil well over $100 a barrel and global warming concerns growing, alternative energy sources are rising to the forefront and investors are certainly taking a greater interest in them lately.

Robert Carey, CFA, First Trust's chief investment officer, said the firm first started looking into wind energy more than a year ago.

"I think the escalation of energy prices and the talk of alternative energy has really made investing in this area more attractive," Carey said. "It's really a convergence of public policy and concerns about the environment—even some local and regional authorities are pushing hard for utilities to use more alternative energy and renewable energy sources."

Set for Growth

Wind energy seems to be an area ripe for growth. According to a report from the Global Wind Energy Council (GWEC), the total global installed capacity at the end of 2007 was roughly 94,000 megawatts, an increase of about 27% from 2006. The council projects that the global wind market will grow 155% by 2012 and account for 3% of global electricity production. GWEC says in the report that wind energy accounted for about 1% of global electricity production in 2007 (similar to solar energy).

Carey pinpointed Europe as the region standing at the vanguard of wind energy development and use, with a strong presence in the fund, and GWEC notes that wind energy accounted for 40% of new power installations in Europe in 2007. However, although seven of the top 10 countries in terms of installed capacity at the end of 2007 were in Europe, the top five included the U.S. (17.9%), India (8.4%) and China (6.3%) alongside Germany (23.4%) and Spain (16.1%). Carey said that the industry would likely see the U.S. and Asia ramping up activity even more in the future.

"[Global wind energy] capacity has been growing rapidly, almost 30% a year. It's been moving along fine, but I think with the high price of oil, natural gas prices being elevated and coal prices being higher, it kind of speeds up the economic inevitability that some of the energy we use—especially electricity—will come from alternative energy sources," Carey said. He noted that the solar energy industry and the wind energy industry have similar stories, with both seeing improving technology and falling costs.

However, like any industry, the wind energy industry does have its obstacles to overcome. Carey cited capacity as a major concern, in addition to finding enough property for large wind farms and the problem of, what he termed, "legislative risk." The wind energy industry's growth is somewhat dependent on the support it gets from local governments, whose outlooks can change depending on the political climate. For example, in the U.S., the federal production tax credit for renewable energy that benefits the wind energy industry is set to expire at the end of 2008 and its renewal is uncertain.

In terms of the fund itself, oil prices could have a significant effect on how investors interact with it.

"You could see investor interest wax and wane depending on the price of oil," Carey said, adding that the investors might find the sector to be sensitive to traditional energy commodities. He also noted that the industry was still in its early growth stages and that it could be more volatile and riskier than the average investment. However, for many investors, that might not seem like a drawback.

FAN-ing The Flames

FAN could find its way into a lot of portfolios. Investors looking to make a bet on the growing alternative energy industry might see it as a good addition to their portfolio, while others may want to use it to round out their energy sector allocation. Carey pointed out that many of the companies in the fund are not familiar names and their stocks have not seen huge run-ups. Many are located in Europe.

"It's going to be a nice vehicle to access companies that are outside the radar of most U.S. investors at this point," he said.

FAN's underlying index, the ISE Global Wind Energy Index, was developed by the International Securities Exchange and currently has 52 components. The index is weighted by modified market capitalization. Pure-play wind energy companies have a total weighting of about 66% (or two-thirds) of the index, while companies that are simply involved in the wind energy industry among their other business activities, such as Siemens and General Electric, represent about 33% (one-third) of the index's total weight.

As a result, it's a mainly pure-play index. Although it has such megacap companies as Siemens, General Electric and Royal Dutch Shell, the top five components are little known: Vestas Wind Systems (10.06%), Repower Systems (9.94%), Gamesa Corp. Tecnologica (8.82%), Hansen Transmissions International (6.50%) and Japan Wind Development Co. (4.81%).

However, it doesn't seem like FAN will be the only player in the field—PowerShares has also filed for a global wind energy ETF. FAN has the first-mover advantage though, which could be significant. Claymore launched its Claymore MAC Global Solar Energy Index ETF (NYSE Arca: TAN) just days before Van Eck launched the Market Vectors - Solar Energy ETF (AMEX: KWT), and after just a couple months of trading TAN has over $160 million in assets versus less than $25 million for KWT.

Name	Weighting (%)
VESTAS WIND SYST	10.06
Repower Systems	9.94
Gamesa Corp Tecnologica SA	8.82
Hansen Transmissions International NV	6.5
Japan Wind Development Co., Ltd	4.81
Theolia	4.47
Nordex AG	4.36
Babcock & Brown Wind Partners	4.14
Clipper Windpower Plc	3.03
GURIT HOLDING AG-BR	2.81

Total Global Capacity
Country	%
Germany	23.4
U.S.	17.9
Spain	16.1
India	8.4
China	6.3
Denmark	3.3
Italy	2.9
France	2.6
U.K.	2.5
Portugal	2.3
Rest of the World	13.9

• More on choosing the right ETF

Comments

[User 177154]

I think these kind of articles give us an opportunity to grow our investments in a positive environmental manner, good for you