rafael

ETF Update: Waiting On China's Currency Release, Less Than Green ETFs, Getting ETFs Into 401(k)s

As the Manager of Cleantech Index (on which the PowerShares Cleantech Portfolio ETF (ticker: PZD) is based, I must address some inaccuracies in Mr. Lydon's article.

1) PZD currently has a small weighting in CREE (under 2% as I write this). How this gets characterized as a ‘large weighting’ is beyond me.

2) PZD currently has about a 5.5% weighting in First Solar - NOT the 15% Mr. Lydon suggests.

3) Clean energy stocks currently account for about 28% of the Cleantech Index and hence, PZD. The Cleantech Index covers the broad spectrum of clean technology businesses from water, to new materials, sustainable agriculture, transportation, and of course, energy efficiency (including those that improve the efficiency of, and reduce the pollution from, carbon-based fuels which Mr. Lydon contends will remain critical for a long time to come.

4) The PowerShares ETFs Mr. Lydon mentions, PZD and PBW, have very different strategies in terms of composition, weighting & risk management, focus, screening criteria, etc. While there is some portfolio overlap, it tends to be exaggerated prior to quarterly rebalancing - especially when a particular sector common to both is hot (e.g., solar), but the weightings are far different.

In the case of solar, PBW currently has just over a 40% weighting in solar stocks, while PZD has 22.7% in solar. Just after the Q3 rebalancing, the Cleantech Index (and hence, PZD), had a solar weighting of about 16% - whereas Wilderhill’s Clean Energy Index was about 25-29%. Naturally, heavy sector weightings tend to be most pronounced just before rebalancing when winners are pruned back.

Finally, most solar stocks have tended to trade quite similarly. Over time, I would expect greater divergence in their fortunes and, I hope, a greater number of more discerning investors (how scarce they are). Since PZD and PBW only have about 50% overlap in their solar stocks and use different weighting schemes, I would expect the weighted overlap to decrease over time.