PowerShares' New Alternative Energy ETFs

Includes: PSP, PUW, PZD
by: Richard Kang

PowerShares has finally launched the ETFs that take choices for alternative energy beyond PBW in this space.

The following 3 funds began trading yesterday on the Amex:

  • PowerShares Cleantech Portfolio (NYSE:PZD)
  • PowerShares Progressive Energy Portfolio (NYSE:PUW)
  • PowerShares Listed Private Equity Portfolio (NYSE:PSP)
  • I’ve commented on all three of these ETFs in the past here:

    A Look at the New Private Equity ETF

    PowerShares WilderHill Clean Energy ETF: Leverage Through Volatility

    97 New ETFs Planned for U.S. Market -- Powershares Leads the Way

    For this entry, I will not comment on the private equity fund.

    For investors in PBW, the new cleantech fund and the progressive energy fund may be a bit of overkill in terms of holding all three. First let’s review PBW:

    PBW peaked at just under 24 in early May ending a 50% rise since the beginning of 2006. Wow. However, like all of the energy complex it fell hard this summer. PBW had a drawdown of roughly 30% hitting lows around 16.30 in late September. In fact, since September 22nd, PBW has risen about 13% to October 16th. A pull back in the past week and a half to just under 18 at the time of writing makes this look like a good point to get in. Recent action can’t be considered evidence of the beginning of a longer term uptrend but we’re still in a much better valuation than we were in early May.

    PBW holds a diverse portfolio of 42 stocks with the largest sector weightings in IT (37%) and industrials (29%). Although it holds a small number of relatively “clean” utility companies, I consider this fund as a Nasdaq play on stocks with an alternative investment bent. I see alternative energy as a new technological wave commonly seen in major Nasdaq uptrends. Tech waves in the past have come in different forms but are clearly based on new innovations such as the biotech/pharmaceutical wave and the telecommunications/internet wave. On the positive side for alternative energy, we’re nowhere near the speculative state of the dot com bubble. But with 42 stocks and a small cap growth bias, this fund is significantly more volatile than the Nasdaq which is a volatile index itself! Based on this kind of volatility, PBW shouldn’t comprise any more than 5% of a portfolio.

    Taking this argument of a high-tech fund to the extreme leads to the new cleantech fund. This is simply one to watch. Here’s the site for this ETF:

    According to the site, “A company is considered to be part of the cleantech industry if it produces any knowledge-based product or service that improves operation, performance, productivity or efficiency, while reducing costs, inputs, energy consumption, waste or pollution.”(emphasis in this quote is mine)

    Also from the website, I find that this fund has sector weights very similar to PBW. In the case of PZD, it’s 27% in IT and 43% in industrials. Again, roughly two-thirds of the fund is dominated by these two sectors. Also similarly, both funds have roughly three-quarters in small cap holdings. Although PZD does not hold utilities like PBW (roughly 9% weighting), there is still a significant amount of common holdings between these two ETFs. Refer to the PowerShares site to find the holdings in both to do the usual comparison shopping.

    I’m eager to see the initial price action of PZD but my expectation is a slightly more volatile chart compared to PBW.

    In the case of PUW, the fund is based on the WilderHill Progressive Energy Index. “The Index is comprised U.S.-listed companies that are significantly involved in transitional energy bridge technologies, with an emphasis on improving the use of fossil fuels. The modified equal-weighted portfolio is rebalanced and reconstituted quarterly.”

    Again, I find it interesting to find another ETF moving away from market cap weighted indexation. This continues the trend started with RSP (Rydex S&P Equal Weighted Fund) and furthered today by firms like PowerShares, Claymore and WisdomTree. Although not an ETF manufacturer, I always try not to forget Dimensional Fund Advisors, the pioneer in the space of non-market cap weighted passive funds.

    Looking at the stats on this ETF (sector weights, underlying holdings dispersion by market cap, etc.) I find it to be the most unique, or at least significantly different in its composition compared to PBW and PZD. I would guess that this would be the least volatile of the three. Despite this assumption, again I have to state clearly it would still be significantly more volatile then the Nasdaq. Here’s a historical chart picked off the PowerShares site:
    PUW ETF Investment

    I still believe that these funds will have strong correlations with the commodity indices, especially with the strong bias in these for energy. Like energy, these will be volatile so I can’t think of holding any combination of these in a sum of more than 5% in a portfolio. There are also other “alternative energy” parts missing with these three funds. For example, what about exposure to uranium? Considering how many nuclear plants exist today and are either being built or are in the planning stages, perhaps it is no longer an “alternative” energy source. Still, it’s another area I like.