Clean Energy ETF Investing 101
Global warming and high carbon and greenhouse gas emission issues have lately resulted in rising popularity of clean or renewable energy sources, which are the world’s best available alternative to fossil fuels. Clean energy comes from natural resources, which are continually replenished, such as sunlight, rain, wind, etc.
High oil and gas prices have given a further boost to the clean energy segment. Moreover, Tesla Motors (TSLA) incredible surge this year has benefitted some of the clean energy ETFs that give a high weightage to that stock in their basket. As a result, the sector has delivered an exceptional performance this year. Going forward the sector is likely to gain further momentum from implementation of President Obama’s “Climate Change Action Plan”.
Clean Energy Outlook
New research by analysts at Bloomberg New Energy Finance (BNEF) shows that annual investment in new renewable power capacity is set to rise by anywhere from two and a half times to more than four and a half times between now and 2030.
The likeliest scenario implies a jump of 230%, to $630 billion per year by 2030, driven by further improvements in the cost-competitiveness of wind and solar technologies relative to fossil fuel alternatives, as well as an increase in the rollout of non-intermittent clean energy sources like hydro, geothermal and biomass.
The International Energy Agency’s (IEA) new policies imply that 57% of power capacity added during 2013-2030 will be from clean renewable resources (including large hydro). In fact, BNEF estimates that wind and solar will take up the largest share of new power capacity added in terms of GW by 2030, accounting for 30% and 24%, respectively.
Investors have been betting on clean energy ETFs for years with disappointing results across the board. Many funds in this space suffered losses in past years, mainly due to reduction in government subsidies, low prices for traditional fuel sources, and a general lack of demand for these risky companies.
Investors have finally seen a bit of a reversal in the market, so far in 2013, as a number of good news hit the segment. Almost all the products in this interesting space have rebounded nicely in 2013 with strong performance.
Clean Energy ETFs in Focus
First Trust Nasdaq Clean Energy Green Energy Index (QCLN)
Launched in Feb 2007, this product follows a benchmark of clean energy companies, providing exposure to about 36 firms in total. It charges a reasonable 60 basis points a year in fees. The fund has an AUM of $63.9 million and trades in an average volume of 52,000 shares a day.
The fund holds medium-cap (50%), small-cap (35%) and micro-cap (14%) stocks. It has maximum exposure in North America and very low exposure in Asia and Europe. The ETF is concentrated in its top ten holdings as these contribute about 62% to the fund. Tesla Motors is the top holding with about 12% of asset allocation.
The fund has given impressive returns of 53.69% as on June 30 for a one-year period. Moreover, the fund has a solid 52-day price performance of 84.80%. Currently QCLN has a Zacks Rank of 3 or ‘Hold’ with a high risk outlook.
Market Vectors Global Alternative Energy ETF (GEX)
Launched in May 2007, GEX tracks the Ardour Global Index, focusing on companies that are primarily engaged in the business of alternative energy. The fund holds about 31 stocks in its basket, charging investors 62 basis points a year in fees for the exposure.
Apart from major holdings in the U.S., the product gives a good international exposure to Europe and some Asian countries. Industrials, Information Technology and Utilities take the top three spots, adding 84% in sector holdings. Further, the fund’s top 10 holdings jointly contribute 63% to the fund. Tesla Motors is the top holding, with more than 12% of asset allocation.
The fund has posted strong returns of 50.67% as of June 30 for a one-year period and has also given a decent yield of 0.41%. Moreover, GEX has also had a strong 52-week price performance of 83.5%. The product has an AUM of $82.9 million.
PowerShares Wilderhill Clean Energy ETF (PBW)
Launched in March 2003, PBW tracks the Wilderhill Clean Energy Index and invests almost 90% in companies related to cleaner energy. The fund charges 70 bps in fees and holds 52 stocks.
The product is tilted more towards growth stocks and is well diversified across various sectors. Information Technology takes the top spot with 43% allocation followed by Industrials (20.43%) and Materials (11%). The top 10 holdings jointly contribute 30% towards the fund. The fund leads the space with an AUM of $203.5 million
PBW has rewarded investors with its solid returns of 32.43% as of June 30 on a year-to-date basis.
The Bottom Line
The alternative energy sector has been performing extremely well, crushing the broad market in the past few months by a pretty wide margin. By and large, most of the gains have actually happened in the past few weeks. Strong data from solar companies and bullish reports from emerging companies have carried the sector sharply higher.