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What to buy? II

May 23rd, 2009 · No Comments

We don’t see much value, apart from some Chinese smallcaps, a few exploration plays, and alternative energy. The latter combines spectacular opportunities combined with a minefield of pitfalls to avoid. There are two ways out of that dilemma…

The first way out would be to do an incredible amount of research. The second, to average the spectacular opportunities with the possible duds, that is, buying sector specific EFTs. We will provide some of these EFT’s below, but first an explanation.

There can be no doubt that alternative energy will be one of, and probably be thè sector to be in for the next decade or more. Combine the facts that traditional (fossil fuel) energy prices are set to rise structurally while alternative energy prices are set to decrease structurally while the energy markets are very large and the role played by alternative energy in the overall energy markets is very small.

That translates into almost guaranteed returns for the alternative energy sector, or does it? Well, there are a couple of pitfalls:

  • It’s hard to know beforehand which alternative energy is going to win out. We haven’t heard about that hydrogen economy that was around the corner a couple of years ago, those corn ethanol fuel plays are twisting and turning in the wind, etc.
  • Even within sectors, it’s hard to back a winning technology. Do you know which battery technology will ultimately win out in powering cars? Or will it be hypercondensators? Or will fuel cells make a comeback? Which solar panel technology are you preparing to back for the next ten years? It’s hard to make definite cases for existing technologies, but many of these fields are witnessing a great deal of innovation in which entirely new approaches and technologies could come out.
  • Even if one has done all the research and came up with a winner (say First Solar), one has to look at the economics of the sector it operates in, answering questions like (how defensible is it’s advantage, how high or low are the entry barriers, how difficult is it to get the raw materials?) and valuation (how much of its future success is already priced in?).

While all of that is highly entertaining, no sure answers are possible (we’re currently reading the CC of LDK, a Chinese solar player). What to do amongst all this uncertainty? Well, there is a second way, the easy way, buy an ETF. The problem here is that there are quite a few, but the following article might help as a guide..

The Complete Guide to CleanTech ETFs

If there is one sure long-term sectoral bet, it should be cleantech. Governments around the world are determined to wean the world off of carbon based fuels, some of which will run out soon anyway. Many nations and most US states now require utilities to purchase a certain percentage of their energy from renewable sources, and nearly every country in the world is expected to have some sort of carbon cap or carbon tax enacted within the next 5 years.

Yet cleantech is a risky play because despite all the investment in the field, most clean technologies are not profitable. Only wind energy can currently compete with fossil fuels without subsidies. But with carbon legislation now inevitable, technological advances bringing costs down, and market values depressed by the financial crisis, the future is looking brighter for cleantech shares.

For the long term investor, cleantech is one of the best sector plays out there. And the best way to play a sector is with a low-cost ETF. This guide will review all 16 cleantech ETFs traded in the US, and offer investors the information they need to add a slice of long term growth to their portfolio. Not all cleantech ETFs are made alike, and we’ll show you which funds are the best bets for future returns:

Broad CleanTech Incicies:

FirstTrust NASDAQ CleanEdge Green Energy Index Fund (QCLN). This fund tracks the Green Energy Index created by cleantech research firm CleanEdge. It invests in about 50 publicly traded companies that specialize in green technologies, and is heavy on firms in the solar, energy efficiency and smart grid space. It isn’t a terribly diverse index, holding few utilities, transportation, storage, or wind names. But it contains some unique picks such as AVX Corporation (AVX) and GrafTech International (GTI). It’s best thought of as a solar ETF merged with a smart grid ETF. Not suitable as the broad cleantech fund in your portfolio , but an aggressive growth-oriented offering that is clearly the best way to play feed in tarriffs, should they come to the US.

Powershares CleanTech Protfolio (PZD). The Powershares CleanTech Portfolio tracks the trademarked CleanTech Index. It is the broadest cleantech play available, with 80 stocks representing everything from algae producers and water treatment suppliers to established wind, solar, geothermal, and utility names. It covers batteries, advanced materials, smart grids, and even environmental consulting in an effort to reflect the total sector. Although much less traded than its PBW cousin, it offers decent liquidity and wider exposure to large cap clean energy players and non-energy cleantech firms.

WilderHill Clean Energy Portfolio (PBW). This offering, also from Powershares, is the largest cleantech ETF by market cap. It offers broad exposure to the clean energy space, the core of the cleantech industry. Its 50 holdings are heavy on solar, storage, and geothermal, while light on wind. It also holds an number of biofuel names and even an ocean power producer. It’s composed almost exclusively of small and mid cap stocks, eschewing more established firms for growth opportunities. Its a great choice, but more conservative investors may prefer the PZD.

WilderHill Progressive Energy Portfolio (PUW). The Progressive Energy Portfolio is distinctly different from its peers. Rather than focusing on the next generation of energy and other environmental technologies, it invests in 45 companies that help make current technologies cleaner. Its largest holdings include “clean coal”, nuclear services, and natural gas. It also has a decent mix of established battery companies. There are a few distinctly offbeat picks in the mix such as Canadian methanol producer Menthanex (MEOH) (methanol is a lucrative industrial gas, but also a left-field choice for an oil substitute). But overall it offers a diversified mix of bridge technologies that would certainly benefit from any carbon cap or carbon tax legislation.

Global CleanTech Incicies:

Powershares Global Clean Energy Portfolio (PBD). The PBD is basically an internationally diversified version of the PBW. It 80 stocks represent most of the PBW’s holdings, plus similar picks traded on global markets. Its international investments, however, are mostly composed of stable large cap stocks such as Vestas (VWDRY.PK) and Sharp (SHCAY.PK), so it offers a wider market cap mix. In terms of the most diverse cleantech ETF, it’s a close call between the PZD, which is more sectorally diverse, and the PBD which is broader geographically. Either would be a top pick for a diversified portfolio.

iShares S&P Global Clean Energy Index Fund (ICLN). The ICLN is essentially a 30 stock hybrid solar/wind fund. It’s the purest play on renewable energy generation, leaving out any smart grid, materials, energy efficiency, or storage names. Its an interesting choice if you want to completely cut out firms such as battery producer Johnson Controls (JCI) that derive most of their revenue from outside the sector. But it leaves out many companies that will thrive in the new energy economy. Its low expense ratio (.48%) makes it the cheapest option available.

Market Vectors Global Alternitive Energy (GEX) The GEX is like a top-heavy version of the PBD. Its index’s methodology leads to giant weightings by large cap stocks in its 30 picks. Its largest holding, Vestas, comprises 20% of the index. It carries a marginally smaller expense ratio (.63 vs. .75), but with weightings like that it may be simpler and cheaper to just buy the individual stock.

Clean Transport ETF:

PowerShares Global Progressive Transportation Portfolio (PTRP). This interesting ETF focuses on one particular aspect of the energy shift, that away from the use of petroleum products in transportation sector. It invests in 32 stocks including biofuel companies, railroads, batteries, and electric vehicles plus train and bus manufacturers. Is a good way to play policy choices that favor public transportation, high-speed rail investment or punish the automobile sector with higher fuel mileage or punitive petroleum taxes.

Environmental Services ETFs:

Market Vectors Envinronmental Services Fund (EVX). The EVX is a unique fund that invests in firms that offer solutions to non-global warming environmental problems. Its largest holdings are in waste management, including leading consumer firms like Waste Management (WMI) and niche industrial players like Clean Harbors (CLH). It also invests in waste-to-energy, environmental consulting, and pollution control companies. It has 19 constiuents are carries an expense ratio of .55%.

Nuclear ETFs:

iShares Global Nuclear Energy Index Fund (NUCL). Although some might object to the nuclear industry rebranding itself as “clean”, no one can deny that it will likely be a big winner from the shift away from carbon. The NUCL invests in 25 uranium miners, reactor constructors, and utilities heavy on nuclear generation. Its broad diversification across sectors and geographical regions, and low expense ratio (.48%) make it the winner in the category, although its tiny market cap (16 million) hurts liquidity and may endanger its future.

PowerShares Global Nuclear Energy Portfolio (PKN). This fund is more diversified than its competitors, but perhaps too much so. Its sprawling list of 65 stocks includes a number of conglomerates which derive only a minority of their revenue from nuclear. General Electric (GE), for example, has traded recently as a financial stock, and certainly doesn’t belong in a pure nuclear ETF. PKN’s high expense ratio (.75%), thin liquidity and poor relative performance make this decision a no-brainer.

Market Vectors Nuclear Energy (NLR). The NLR is little different than the PKN in that it seems to fill its index’s 25 stock quota with conglomerates that don’t trade with the industry. It shares the PKN’s poor relative performance and only marginally beats its expense ratio.

Solar ETFs:

Claymore/MAC Global Solar Energy Index (TAN). The TAN invests in 25 solar photovoltaic and solar materials companies around the world. Its largest holdings are in Germany and China, and it is light on the silicon producers. It carries an identical expense ratio (.65%) and performance closely mirrors the KWT.

Market Vectors Solar Energy (KWT). The KWT is hardly different from the TAN. The TAN is slightly more internationally oriented, is more established and the much larger of the two. Considering their nearly identical expense ratios and performance, TAN is clearly the way to go in solar.

Wind ETFs:

PowerShares Global Wind Energy Portfolio (PWND). Powershares’ wind offering is the purer play of the two wind ETFs traded in the US. Its 30 holdings include the world’s major wind turbine players, and global utilites who sell lots of windpower.

First Trust Global Wind Energy (FAN). FAN is a broader index of 45 stocks including several smaller players in the windpower market, and some surprising conglomerates. The FAN invests in both BP (BP) and Royal Dutch Shell Group (RDS.A), which hardly trade has cleantech companies and may be objectionable to some ethically minded investors. Although FAN is the larger and cheaper of the two, it has underperformed the PWND significantly.

ETF Grind CleanTech Picks:

  • Broad Cleantech: PZD or PBD
  • Nuclear: NUCL
  • Solar: TAN
  • Wind: PWND

Tags: Alternative energy