‘Go Green’ if you want to get a greener and a cleaner tomorrow, is the global mantra. This is no less pertinent for the energy sector that utilizes mainly coal and other 'dirty' fuels to generate electricity.
In the wake of environmental concerns, renewable sources of energy have come into prominence. While market conditions were not in favor of alternative sources for the last two years, 2013 has been a year of stimulation for investors in the clean energy space. (Read: Go Green with These 3 Clean Energy ETFs).
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 gas and oil prices have also brought the clean energy space into spotlight. Moreover, Tesla Motors' (TSLA) incredible surge this year has benefited some of the clean energy ETFs that give a high weighting to that stock in their basket (read: Clean Energy ETFs: The Real Bull Market?).
From an investment point of view, 2013 has seen many investors pile into the space. Despite a few hiccups, the overall trends favor the space. Nearly, all the funds in the clean energy space have had a great run this year.
Furthermore, many companies have actually seen pretty solid performances to start 2013; finally beating out more traditional energy firms in year-to-date terms.
However, investing in clean energy is quite risky and especially so from an individual security perspective. For this reason, a clean energy ETF approach could be the way to go, as this still allows for a bet on clean energy but with hopefully a more diversified and lower risk technique (read Behind the Rebound in Energy ETFs).
If investors like this idea, it should be noted that there are a plethora of ETFs tracking this segment currently on the market, each with their own set of pros and cons. For this article, we have selected three of the best performing clean energy ETFs that focus on the broad space, as any of these could be big beneficiaries from a continued positive trend in this intriguing corner of the stock market.
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 $61.2 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 a 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 61% to the fund. Tesla Motors is the top holding with about 11.4% of assets.
This ETF has a solid 52-week price performance of 54.10%. Currently QCLN has a Zacks ETF Rank of 3 or ‘Hold’ with a high risk outlook (read: Clean Energy ETF Investing 101).
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 64% to the fund. Tesla Motors is the top holding, with more than 13.5% of asset allocation.
GEX has also had a strong 52-week price performance of 58.62%. The product has an AUM of $80.8 million.
PowerShares Wilderhill Clean Energy ETF (PBW)
Launched in Mar 2003, PBW tracks the Wilderhill Clean Energy Index and invests almost 90% in companies related to cleaner energy. The fund charges a hefty 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 a 43% allocation followed by Industrials (20.43%) and Materials (11%).
The top 10 holdings jointly contribute 30% towards the fund. The ETF leads the space with an AUM of $186.2 million (see: Behind the Surge in the Wind Power ETF).
PBW has rewarded investors with its solid returns of 29.4% over the past one year.
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 months. Strong data from solar companies and bullish reports from emerging companies have carried the sector sharply higher.
Should we or shouldn’t we be optimistic about this incredible run can now only be guessed, but a pullback from these lofty levels—due to some short-term profit taking—seems likely. Still, one must remember that many alternative energy ETFs have a long way to go to get back to all-time highs, so there still could be plenty of room to run in this intriguing, but often overlooked, space.
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