There is little question that green technology is here to stay in the U.S. From cleaner power generation to environmental remediation, these technologies help reduce dependence on foreign oil, improve the environment, and even increase efficiency and productivity in many cases for companies, governments and other end users.
These dynamics promise to drive the global market for green technology from $200 billion in 2010 to $312 billion in 2015, according to a report from BCC Research. Investors looking to capitalize on this strong 9.2% compound annual growth rate (OTCPK:CAGR) have many options. In this article, we'll take a look at some of the most popular green technology ETFs.
Investing in Green Technology with ETFs
Exchange traded funds (ETFs) offer one of the easiest ways to invest in green technology, since they offer instant diversification in a single security. While some of these ETFs are trading down due to subsidy cuts in green technology, they do provide great exposure to the industry and could therefore see a recovery when green technology rises again.
Some of the most popular green technology ETFs include:
- PowerShares Cleantech Portfolio ETF (NYSE: PZD)
- PowerShares WilderHill Clean Energy ETF (NYSE: PBW)
- PowerShares Global Clean Energy Portfolio ETF (NYSE: PBD)
There are also many sector-specific ETFs including:
- Solar - Claymore/MAC Global Solar Index ETF (NYSE: TAN)
- Wind - First Trust Global Wind Energy ETF (NYSE: FAN)
- Nuclear - Market Vectors Nuclear Energy ETF (NYSE: NLR)
- Water - PowerShares Water Resources ETF (NYSE: PHO)
Managing Risks with Green Technology
Green technology investments have higher risk than most investments since they are dependent on subsidies in many cases. For instance, many solar companies experienced significant drops of 70% to 90% in share price from a combination of industry oversupply (led by too many subsidies) and falling demand (as subsidies were cut).
Investors can manage these risks in a few different ways. First, investing in many different green technologies and companies can help reduce risk through diversification. ETFs make this process easier by investing in a basket of companies with just one security. And second, investors can explore many different options strategies to help tilt the odds in their favor.
The most popular options strategy to reduce risk is writing covered calls. In this case, investors simply give investors the right to sell at a given price in exchange for an upfront premium. The worst case scenario is therefore selling the stock at a profit and leaving money on the table, while the other scenario involves collecting the option premium to reduce the breakeven point.
Adding Green Technologies to a Portfolio
Green technology stocks should rarely compose an entire portfolio, but instead be incorporated into a larger portfolio. When integrating green technology companies, it's important to take into account their risk and effect on the rest of a portfolio. The best way to do this is by comparing a stock's beta co-efficient to the portfolio's beta co-efficient.
Higher beta co-efficient signifies greater volatility and therefore greater risk for investors. Many green technology companies have high beta co-efficient compared to the S&P 500 average of 1.0, since they tend to be very volatile for the aforementioned reasons. Balancing these high beta co-efficient with less risks stocks across a portfolio can help manage risk.
One popular strategy is to purchase green technology stocks to pair with traditional stocks that are far less risky. For example, an investor may purchase Exxon Mobil (NYSE: XOM) - that has a 0.52 beta co-efficient - and a green technology company that has a 2.0 beta co-efficient in order to balance each other out to a more average figure of around 1.0.
Key Takeaway Points
- The green technology industry is poised to rapidly grow over the coming years at a 9%+ compound annual growth rate, according to BCC Research.
- Investors can capitalize on this growth by purchasing many different ETFs, which offer great diversification and are very easy to trade.
- Despite the promise, investors should carefully diversify their green technology investments in order to maximize risk-adjusted returns.