New PowerShares ETF to See Which Way the Wind Blows

By Murray Coleman

Less than two weeks after the first wind energy exchange-traded fund hit the market, a more concentrated and at least initially more expensive alternative is set to launch.

The PowerShares Nasdaq OMX Clean Edge Global Wind Energy Index (PWND) is expected to begin trading Tuesday. It's slated to charge an annual expense ratio of 0.75% and open with 31 different companies.

That compares to the First Trust ISE Global Wind Energy Index Fund (FAN), which debuted on June 18 with 67 names and a net expense ratio pegged at 0.60%.

(Note that without a fee waiver good for at least two years, that fee would be 0.87%. Although the practice is common in the funds world, it's worth noting that by comparison, PWND decided to launch without the benefit of any fee waivers.)

But more differences abound. Among those are geographic distributions. The underlying index for PWND, which was developed by alternative energy researcher Clean Edge Inc. and the Nasdaq's indexing arm, starts with a mix of: Spain (12%); Germany (17.1%); Denmark (13.9%) and the U.S. (11.25%). The other eight countries represented are all in single-digits in terms of weightings. Those are: Belgium, Hong Kong, Japan, the U.K., Switzerland, France, Greece and Canada.

Compare that to FAN's dispersion: Germany (23%); U.S. (17.9%) and Spain (16.1%). Seven other markets fall into single-digits ranging from India's 8.4% to Portugal's 2.3%. Wedged between are China, Denmark, Italy, France and the U.K. Other countries with smaller smidgens totaled another 13.9% of FAN's index.

Both ETFs emphasize what they consider to be pure-play wind energy players. With FAN, some 66% of its weighting is given to companies with most of its business coming directly from wind energy. (See related story.)

In PWND, 90% of the weighting goes to so-called pure-plays. But each of the multinationals that aren't pure-plays and make up the other 10% of the portfolio's total could conceivably grow to 15%, based on cap rules for individual holdings built into the ETF's benchmarking methodology.

Clean Edge uses a quantitative-based stock picking system to determine what goes into the fund. The Nasdaq then sets and maintains the rules-based modified market-cap sized weighted index. To be considered a pure-play, a company must produce at least 1,000 megawatts of energy - about the same amount as a conventional power plant - or generate $1 billion annually from wind-related power.

The index provider for FAN says it determines wind energy pure-plays using a broad, fundamental analysis of business drivers. Then researchers at the International Securities Exchange apply specific capitalization minimums and liquidation rules to weed a list of more than 80 possible names to its present level.

PWND also sets minimums in those areas. According to its prospectus, companies included in the ETF's benchmark must be listed on a recognized global stock exchange, must have a minimum float-adjusted worldwide market capitalization of $100 million and a minimum three-month average daily trading volume of $400,000 to be considered.

The providers of PWND say that their index will probably have fewer utilities as a result of the 1,000 megawatts requirement. The weightings of top stocks also at least initially will look different. For example, Nordex AG out of Germany is one of four names at the top of the new wind ETF's holdings at 10%. Meanwhile, FAN gives the firm a 4.36% weighting.

Both give Denmark's Vestas Wind Systems around a 10% weighting. But Spanish giant Gamesa Corp. has 10% of PWND's total and about 8.8% in FAN. Another top holding in QWND, Spain's Iberdrola, isn't even included in FAN's top names.

So while both provide an easy and efficient way for individual investors to access a hot area of alternative energy, definite differences are apparent in the two. More important than differences in portfolios, however, will be the unique methodologies used by each index provider. Those should prove to deliver somewhat different results between the wind energy ETFs as market cycles change.

• More on choosing the right ETF

Comments

[Geoffrey Lordi:]

...Iberdrola was sorely missed in FAN...

2008 Jul 01 10:07 AM