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David Jackson The Green Investor

David Jackson, The Green Investor

Choosing the Right Green ETFs

by David Jackson

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Posted on Wednesday, November 28, 2007, 12:00AM

It's as compelling an investment theme as you'll ever come across. With global energy demand rising sharply, oil prices at all time highs, climate change concerns growing, and new technologies enabling more efficient power extraction from natural resources, the case has never been better for investing in alternative energy companies that will help us overcome our oil and carbon-emission addictions.

But try to pick a winner from the dozens of "green energy" stocks that have emerged in the past few years and you quickly find yourself slipping from confident investor to shaky speculator. Who's to say which of the upstart, publicly traded solar energy companies, for example, will produce the efficiency breakthroughs that field has anticipated for over 20 years?

ETFs to the Rescue

For investors who are sold on the alternative energy theme but hesitant to stock-pick, the recent profusion of exchange traded funds (ETFs) couldn't have come at a better time. These low-fee funds offer diversification by holding a basket of stocks that follow a particular index, and may have tax advantages over traditional mutual funds.

There are currently six alternative energy ETFs to consider. Note the significant differences -- in investment focus, international exposure, market cap, and expenses -- in each fund's holdings:

1. PowerShares WilderHill Clean Energy Portfolio (PBW)

Listed in March 2005, PBW was the first alternative energy ETF and tracks the WilderHill Clean Energy Index. The fund holds 40 U.S.-listed companies that produce green or renewable energy and related technologies. It's focused on small-caps (69 percent weighting) and is dominated by information technology companies (41 percent of holdings). The ETF charges a 0.60 percent annual fee that will weigh on gains. The relatively volatile PBW has returned a 22.5 percent gain since its inception, but dropped just over 6 percent in the past year. See PBW's full holdings.

2. PowerShares WilderHill Progressive Energy Portfolio (PUW)

This ETF differs from PBW by focusing on companies providing "transitional energy bridge technologies" -- that is, technologies that improve the use of existing fossil fuels, rather than entire new approaches. PUW also has heavy small-cap exposure (49 percent), but offers relatively diversified sector exposure: the largest single sector, industrials, constitutes just 28 percent of the fund. Since its inception in October 2006, PUW has returned a strong 18.7 percent; it also charges a steep 0.60 percent yearly fee.

3. PowerShares Cleantech Portfolio (PZD)

This ETF tracks the Cleantech Index, which aims to capture the potential for companies that "produce any knowledge-based product or service that improves operation, performance, productivity, or efficiency, while reducing costs, inputs, energy consumption, waste, or pollution." PZD is heavily weighted toward industrials (59 percent), with 63 percent of its holdings in small-caps; like the other PowerShares ETFs, it has a 0.6 percent expense ratio. See PZD's full holdings.

4. Claymore/LGA Green ETF (GRN)

GRN launched in December 2006, and follows the Light Green Eco*Index, which is comprised of about 200 stocks that are in some way active in alternative energy. Yet a quick look at GRN's holdings reveals the world of difference between this and the PowerShares ETFs. Top holdings of GRN read more like the S&P 500: Mobil, Citigroup, and General Electric -- mega-cap corporations that allocate a certain (no doubt, growing) portion of their investment or R&D in green technologies, but are hardly "pure plays" on the alternative energy theme. GRN has a 0.6 percent yearly fee.

5. Van Eck Global Alternative Energy ETF (GEX)

Launched on May 9, 2007, GEX tracks the Ardour Global Index (Extra Liquid), which is composed of stocks in 30 publicly traded companies that obtain at least half of their revenue from alternative energy activity. GEX is unique among its peers in two key ways: emphasizing large-cap exposure (31 percent of the fund's holdings; small-caps are only 26.9 percent), and international reach (European companies constitute 47.1 percent of the fund, China/Japan 11.1 percent, and U.S. 41.8 percent). GEX charges 0.65 percent annually.

6. First Trust NASDAQ Clean Edge ETF (QCLN)

Launched in February 2007, QCLN follows the NASDAQ Clean Edge U.S. Liquid Series Index, which captures five subsectors of the alternative energy industry: renewable power generation, renewable fuels, energy storage and conversion, energy intelligence, and advanced energy-related materials. The 44 stocks in this basket are almost entirely small-caps. QCLN charges a 0.68 percent annual fee.

Building a Green Portfolio

How should you fit these ETFs into your portfolio? One option is to build a "core portfolio" of broad index ETFs using Seeking Alpha's guide to building portfolios with ETFs and then add one or more of these narrower ETFs to "tilt" your portfolio to green investing.

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36 Comments

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  • eaamon - Wednesday, January 9, 2008, 6:09PM ET  Report Abuse

    • Overall: 5/5

    green does not include nukes or oil companies! so check their holdings.

  • Dilip - Wednesday, January 9, 2008, 11:46AM ET  Report Abuse

    • Overall: 2/5

    Leaving emotional side asides, green energy sector is projected to grow in future. It's good area to invest in. But you need carefully study the portfolio before investing in these ETFs. Author did miss PBD which is much better ETF than any of the listed ones.

  • Yahoo! Finance User - Tuesday, January 8, 2008, 10:40PM ET  Report Abuse

    • Overall: 3/5

    It's pretty scary that people support the green lifestyle and seem to automatically feel that they will make money investing in green companies. Hey, I love the Jacksonville Jaguars so I think I'll bet $10 million on them to beat the New England Patriots and cover the spread. Then I'll use the rest of my money to invest in a homebuilder company since they built my house and they did such a great job.

  • Aaron - Tuesday, January 8, 2008, 9:57PM ET  Report Abuse

    • Overall: 2/5

    The only "Green" investment that will be sustainable long-term will be Uranium...the others are over-bought

  • Christopher - Tuesday, January 8, 2008, 5:17PM ET  Report Abuse

    • Overall: 4/5

    Wow, what a hot button this pushed for some pansies out there. It looks like many of the financially astute commentors are sadly uninformed on some of the key drivers in this market niche. State & city governments, not national, are beginning to implement mandatory "green building" guidelines such as LEED certification. This will vastly change the landscape of construction in the US, and many companies are rushing to get into LEED-certified buildings for obvious image reasons. With few "green" buildings availalbe today, new commercial construction - albeit slowing - will be heavily influenced by green issues. It is, by far, the #1 topic in commercial construction today. Solar is being increasingly used for power generation and water and environmental control systems Is it a bubble in the making?...maybe, but if so the pump is only beginning to be primed. Did no one make money in the tech or housing? It was the late-comers and over-indulgers that got seriously burned in both cases...after a lot of smart money was cashed in.

  • El Viejo - Tuesday, January 8, 2008, 4:18PM ET  Report Abuse

    • Overall: 3/5

    so this is PT's replacement ... will give him the benefit of the doubt, give him a chance .... topic is interesting enough and he gave examples .... better than you-know-who eh ? .... but agree with others, URANIUM is where it's at baby !!!

  • Da Big Guy - Tuesday, January 8, 2008, 3:50PM ET  Report Abuse

    • Overall: 2/5

    I have to agree with hydrogenbob. Those who know me or have read my posts will easily assertain that I am a proponent of reasonable solutions to environmental concerns. I also believe "green" investments will dominate the markets in the fairly near future (much like dot com). If David wants to "Tilt" us to broad index ETFs why is he concerned about small cap exposure? Maybe I'm reading him wrong or maybe the summary's aren't written clear enough. Just keep Big Oil out of it!

  • JASON - Tuesday, January 8, 2008, 2:36PM ET  Report Abuse

    • Overall: 2/5

    Live green, invest for long term growth. Green investing is nothing more than a marketing ploy to exploit middle class guilt. Individuals can live a green life and seriously reduce their personal negative impact to the environment. Teach your kids as well. Investment criteria should be limited to risk, reward and timeframe.

  • Rodger - Tuesday, January 8, 2008, 2:26PM ET  Report Abuse

    • Overall: 3/5

    Good description of some of the available funds. But as an oil & gas professional, these "green" energy sources aren't all that green when a total energy consumption analysis is performed. Wind farms don't grow - there is a lot of steel and energy consumed in producing and transporting these things, and unless the wind blows all the time they are generally used as back-up supplies. Cost is another issue - for instance, clean diesel in a Fischer-Tropsche gas to liquids plant costs around $24,000 per barrel per day of output and is only economic when gas sources are "stranded" - far from market and obtained at very low cost because there is no market for it - whuch, usually is in the middle of an ecologically pristine place. Everything has its cost, and there really isn't "clean" energy - only the finished product looks clean - making the machines to make the "clean" energy is often a very dirty business.

  • DAVID - Tuesday, January 8, 2008, 1:32PM ET  Report Abuse

    • Overall: 1/5

    Short 'em. By the time the "experts" get around to hyping something, they've already made their move.

  • G - Tuesday, January 8, 2008, 1:22PM ET  Report Abuse

    • Overall: 5/5

    Frankly, I'm not interested in 'green' investments, but I have to give Yahoo Finance five stars for providing more substantive and well-researched columns related to financial matters instead of career counseling. YF, your New Year's resolution is coming along quite well...keep it up!

  • Yahoo! Finance User - Tuesday, January 8, 2008, 1:17PM ET  Report Abuse

    • Overall: 1/5

    "David Jackson, The Green Investor" ... In more ways than one.

  • Yahoo! Finance User - Tuesday, January 8, 2008, 11:31AM ET  Report Abuse

    • Overall: 4/5

    While it's true solar and other green technologies have been around for awhile without success, let's remember past failure does not guarantee future failure. Computers, for example, were around for decades serving a variety of niche markets. But to the public who'd been promised interactive, talking computers in the '50's, the state of computer technology in the '80's could have been perceived as failure to live up to hype. Finally, in the '90's, they reached a tipping point where they became commercially viable for the masses and achieved tremendous commercial success. Looking at the rapidly falling costs to produce solar and other "green" technologies, it appears we may be approaching another tipping point. Numerous solar companies have tremendous profit margins and growth. While much of that can be attributed to government subsidies, the fact remains that costs are dropping and various green technologies are approaching (or in a few cases have arguably achieved, depending on how you crunch the numbers) economic parity with fossil fuels. All this is not to say that investors should blindly buy into everything "green" without due diligence. I'm a huge believer in the future of sustainable energy technologies, but I've recently been reducing my positions in that sector because of, in my opinion, excessive valuations indicative of a bubble (much like dot-com, for instance). Be careful, but don't dismiss a whole industry because of past failures...where would the light bulb industry be if Edison had given up after a few failures?

  • Yahoo! Finance User - Tuesday, January 8, 2008, 11:31AM ET  Report Abuse

    • Overall: 1/5

    Investing directly in alternative energy companies (wind/solar) is a much better strategy than sector ETFs.

  • joeld - Tuesday, January 8, 2008, 11:13AM ET  Report Abuse

    • Overall: 3/5

    It’s good to see an article related specifically to this sector. Some of the information is not completely accurate in my opinion though. In particular he states that PBW dropped 6% last year I’m not sure where he got this information since last I had over a 40% return. So the .60% fee was well worth it. For some of the posters as far as the companies not being profitable you better take another look. First Solar for instance has almost a 30% profit margin and over 900% quarterly earnings growth yoy.

  • Steven - Tuesday, January 8, 2008, 11:09AM ET  Report Abuse

    • Overall: 5/5

    Wow. A well written article with useful information for investors. This must be a first for Yahoo. I'm not into the whole "Green" scene, but this is great information for people who are. It is amazing how the level of articles has improved since Yahoo dumped PTrunk.

  • hellriser - Tuesday, January 8, 2008, 11:06AM ET  Report Abuse

    • Overall: 1/5

    yea right get the basket of good and bad stocks. No thanks i would rathe cherry pickmy stocks.

  • Juanita - Tuesday, January 8, 2008, 10:55AM ET  Report Abuse

    • Overall: 5/5

    The best among the cream,green investing is in and so as global green awareness .A million thanks to you,all these ETF's written by you will have international attention from then on. You have educated green technology ETF's among us all.

  • Joseph - Tuesday, January 8, 2008, 10:49AM ET  Report Abuse

    • Overall: 2/5

    The only economic "green" energy play is nuclear. We went through all of this solar/ethanol hype back in the late-70's and it didn't pan out then and it won't pan out now. Trendy, speculative ETF's are not responsible investments!

  • RaK - Tuesday, January 8, 2008, 10:02AM ET  Report Abuse

    • Overall: 4/5

    i have been a proponent of alternative energy for several years now. ETFs in my opinion offer the best means of investing in this market sector as individual stocks in the space are difficult to pick. i also put together a forum for investing in alternative energy. altenergyforum.com

  • Yahoo! Finance User - Tuesday, January 8, 2008, 9:27AM ET  Report Abuse

    • Overall: 4/5

    Thanks for the options on green ETFs. For those of you giving one star, I'm not sure why you wasted your time reading this article - you knew you would never listen to the advice. For those of use who are considering investing in green stocks (for returns but also for the environment), this article was very helpful. By the way, high of 64 in Boston today - it's possible this is just a natural cycle of the earth with a bunch of warmer-than-average years coming, but it is also possible that our pollution is contributing to it. Either way, why not play it safe and assume the worst? Look at the downside in each case - if it is global warming and we do nothing, future generations will look back on with resent as an ignorant generation; if it is not global warming, and just another cycle of the earth, but we act as if it were global warming, then the downside is that there is less smog, a stronger o-zone, and less reliance on the terror-breeding middle east for oil - all because we acted as if it were global warming - wouldn't that be terrible??

  • Feddere - Tuesday, January 8, 2008, 8:48AM ET  Report Abuse

    • Overall: 4/5

    I like what I see. The new green is the challenge of innovation with science and technology (the invention of 100% reusable paper, improved methods of waste treatment), not a punishment of the people (don't print out so many pieces of paper! don't forget to sort the trash!).

  • Nick Name - Tuesday, January 8, 2008, 8:38AM ET  Report Abuse

    • Overall: 1/5

    These funds/stocks are being hyped to the max right now. Its a replay of the internet bubble of the late 90s - most of the stocks within these funds are big money losers and even the ones that arent are only surviving because of government funds that prop them up. That efficiency break thru on solar, for example, has been promised for 30 years. The cost of replacing my current electric service ($40/month) with solar would be in excess of $15,000 to start (not including maintainance, panel replacements, battery replacement, ect) The wealthy can afford the luxury of "going green" but without huge government subsidies (which ultimately come out of the taxpayers pocket), the rest of us wont be going solar or even wind power any time soon. Not that its not important to explore alternative energy sources - it is, but from the viewpoint of making real money off these technologies any time soon, its not going to happen any time soon. The green bubble will burst.

  • Yahoo! Finance User - Tuesday, January 8, 2008, 8:24AM ET  Report Abuse

    • Overall: 1/5

    Oh joy, another liberal trying to tell me that environmental stocks are the way to go. Please. As Global Warming gets more and more exposed, the value of "going green" will diminish. Investors need to ignore hippie investors like this and stick to what works. Certain commodities will always gain and there are a host of traditional stocks that will significantly outgain "green" stocks. The liberalism of going "green" is just another fad just as preparing for Y2K was a fad as well as buying into all of those tech stocks that failed in 2000. Stick with what works and don't believe the media hype towards what the nation might trend towards. If Democrats win in 2008, do you honestly believe they'll "clean the environment"? See Clinton's reign. The only thing he did was to cap off oil pumps in Alaska. Factories still polluted as much as they did before and alternative energies WERE NOT researched. Welcome to reality...

  • Yahoo! Finance User - Tuesday, January 8, 2008, 8:16AM ET  Report Abuse

    • Overall: 4/5

    Good article for the "green" fans. Just remember that there is the potential for extreme volitility with green ETFs because not all new technologies will take off and produce large returns. You could get burned very easily...I'd prefer investing in sectors that have made money. Green investing is borderline speculative investing. In David's zeal to be trendy, it's unfortunate he neglected to mention that aspect. Remember, it's not easy being green.

  • Yahoo! Finance User - Tuesday, January 8, 2008, 8:12AM ET  Report Abuse

    • Overall: 4/5

    bhamock - Green investing is about making money by being responsible. If you're only interested in making money, you're wasting your time reading articles like this. You're certainly wasting ours by posting comments to them. Learn to think for yourself.

  • Stock - Tuesday, January 8, 2008, 7:51AM ET  Report Abuse

    • Overall: 4/5

    I am grateful for the attention that green stocks are finally getting. In many industries, environmentally conscious companies outperform their peers, i.e. whole foods. Also, rising oil prices in the face of recession exhibit pressure towards innovative sources of cheap energy, which will shift demand for alternative, 'green' investments upwards. The bull market might be coming to a close. It is time to think of newer, fresher, and more defensive moves. Green technologies are a sound economic investment for the long term investor.

  • Papa - Tuesday, January 8, 2008, 7:00AM ET  Report Abuse

    • Overall: 4/5

    Very good information on Green Energy ETFs. Green Energy is where we're heading so it pays to get in early.

  • daniel - Tuesday, January 8, 2008, 2:40AM ET  Report Abuse

    • Overall: 5/5

    Thanks for the information. Wanted to know all the green ETF options.

  • RR - Tuesday, January 8, 2008, 12:12AM ET  Report Abuse

    • Overall: 1/5

    Another idiot. Is this PT's brother or ex? So you want to make money why pick "GREEN" stocks. Pick stocks that will make you GREEN money. Do you see Buffet buying GREEN energy stocks? NO, of course not. Another Suze Orman without a dress. Oh, that's right. She never wears them either. Next! Did you get these picks from Ben Stupid Stein or did you invest in these first before recommending these dogs?

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