New Wind ETF Cools Off Sunburned Portfolios

Since I last covered clean energy mutual funds and ETFs, the sector has seen the launch of two solar ETFs: (KWT), the Market Vectors Solar Energy ETF from VanEck,  and (TAN), the Claymore/MAC Global Solar Energy ETF.   Continuing in the tradition of cute ticker symbols, First Trust's new global wind energy ETF is (FAN).

I recommend that investors stay away from the (very expensive) green energy mutual funds, and invest either in one of the ETFs, or if they have a few tens of thousands of dollars to invest and are willing to roll up their sleeves a little, they buy a representative sample of the stocks (a "tracking portfolio") held by the mutual funds and ETFs, and save further on expenses.

The Problem with Tracking

The difficulty of tracking portfolios in clean energy for North American investors is that the wind sector is dominated by European companies, which can require considerable knowledge and cost to purchase.  This is why, in the past, I preferred (GEX), the Market Vectors Global Alternative Energy ETF.  With the introduction of FAN, that problem is now solved.  The Fund's top three holdings, Vestas, REPower, and Gamesa are the world's leading wind turbine manufacturers, and between them control approximately half of the worldwide market for turbines. 

Vestas alone has 23 percent of the worldwide market for wind turbines.  Wind power is the largest source of renewable electricity after hydropower, and also the fastest growing renewable electricity source.  It is also one of the most economical, producing power at a price comparable to the cost of generation from a newly built coal plant or natural gas turbine, and even cheaper in some locations.

The only major wind manufacturers in which a North American investor can easily buy are General Electric (GE) and Siemens (SI).  Since these are large conglomerates, wind turbines are only a small fraction of their business.  Both also have extensive exposure to other clean energy sectors, which is why they are included in the example portfolio below. 

Bright Contrast

In marked contrast, the new Solar ETFs do not greatly add to a retail investor's ability to invest in the solar space.  There are more public solar companies than I keep track of, so aside from speculating on short term movements of the solar sector, I see little reason to use the Solar ETFs.  Exposure to solar can be easily accomplished through individual stocks, or as part of the broader clean energy ETFs.  

I personally tend to underweight solar most of the time.  While I believe the solar sector will be a tremendous growth story, I also feel solar's potential is already well appreciated by investors.  This makes it difficult to find well valued solar companies.

A Model Portfolio

How would FAN be used as part of a larger clean energy portfolio?  If I had $20,000 to invest in clean energy companies today, for an investor with an above average risk tolerance, here's what it would look like (note, this portfolio is intended only as an educational example, not individual investment advice.  The particular companies chosen for each sector would also change due to changes in valuation, and a smaller (larger) portfolio or higher (lower) commissions would lead to fewer (more) companies being included.  

Transport		$7,000
	Bus - New Flyer (NFYIF.PK)	$3,000
	Rail - Portec Rail Products (PRPX)	$1,500
	Rail - Greenbreier (GBX)	$1,500
	Batteries - Electro Energy (EEEI)	$1,000
Power		$8,000
	Wind - (FAN)	$2,000
	Transmission&Wind - Composite Tech Corp (CPTC.OB)	$1,000
	Geothermal - Ormat (ORA)	$1,000
	Inverters - SatCon or Xantrex (SATC) (XARXF.PK)	$1,000
	Storage - Active Power (ACPW) or Maxwell (MXWL)	$1,000
	Efficiency - Cree, Inc (CREE)	$1,000
	Efficiency - Waterfurnace (WFIFF)	$1,000
Diversified (see note *)		$5,000*
	Diversified - General Electric (GE)	$1,000*
	Diversified - Sharp (SHCAY.PK)	$1,000*
	Diversified - ABB (ABB)	$1,000*
	Diversified - Johnson Controls (JCI)	$1,000*
	Diversified - Owen Corning (OC)	$1,000*

*Note: if I were investing as part of a larger portfolio, I would actually invest about $4,000 in each of the "diversified" companies (a total of $20,000 rather than $5,000), and reduce the broader portfolio's allocation to general large cap stocks by $15,000 to compensate for the limited exposure of these companies to clean energy.

This portfolio is not similar in composition to the existing ETFs. Instead it heavily over weights my favorite sectors - efficient transport, and grid infrastructure, while almost ignoring popular sectors such as solar.  I do like wind, on the other hand, so FAN is a useful part of the portfolio, in addition to the wind exposures from CPTC.OB, the inverter stock, and the diversified conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in Gamesa, GE, SI, NFYIF, PRPX, GBX, EEEI, CPTC, ORA, STAC, XARXF, ACPW, MXWL, CREE, WFIFF, GE, SHCAY, ABB, JCI, OC.

Comments

[Alan Young:]

Thanks, Tom, you make some good points.

As it happens, I do have just about $20k to invest in Alternative Energy, but if I implemented your strategy, I'd have a lot of trading costs, at $9 per pick. That hardly beats managed-fund expense, especially if I have to revise some of the picks.

My other concern is the liquidity/spread of the .PK issues. Can you comment on this? I especially like Sharp and New Flier.

--Aalan

2008 Jun 30 10:50 AM

[fran:]

20 xctns x $9 per==?

2% x $20000==?

with $20000 to risk, your concern is what ?

what is anticipated return and what is timeframe?

2008 Jun 30 02:02 PM

[d_teller:]

Another author, today, commented on the poorly constructed & uncorrelated 'Timber" ETFs, CUT & WOOD, which have the same shortcomings as the ones mentioned in this article.

I suggested, in a comment that timber-investors pick and choose real timber investments, vs. land, debt holders and paper mills... and thereby make their own ETF section of a portfolio with individual securities. The author has done the same for this particular "green sector" of alternative energy.

2008 Jun 30 05:19 PM

[heybob:]

I switched to SogoTrade, www.sogotrade.com/Defa..., and have saved many $$$ in commissions over Ameritrade.
SogoTrade Premier account commissions are $1.50 per trade with unlimited trades and only a $10 monthly fee. Also, trade executions are much faster than Ameritrade. No mutual fund or options trading which I don't do anyway. Good luck.

2008 Jul 08 08:58 AM

[longtermstocks:]

Great post thanks. I like the way you name stocks not just make general statements.

2008 Aug 20 02:48 PM

[FWallace:]

? What no mention of SATC... this alternative energy company recently won a hugh commercial contract to provide Solar technology to Boston's Atlantic City Convention & Vistors Authority..... nice!
boston.bizjournals.com...

2008 Aug 21 10:49 PM