A Comprehensive Guide to Alternative Energy ETFs

Amid widespread environmental concerns, alternative energy is making a strong headway in the power generation fuel mix in many developed and developing nations. While market conditions were not in favor of alternative sources for the last two years, 2013 can be considered as a year of stimulation for investors in the clean energy space.

A major growth area in the renewable space is solar energy. The solar industry appeared to be doomed in 2012. However, But this year has seen a remarkable pullback supported by a number of driving forces. (Read: Inside the Incredible Surge in Solar ETFs)

Again, President Obama’s fresh environmental plan has proved to be beneficial for renewable energy stocks. (Read: 3 ETFs to Buy for Obama’s Climate Change Plan). With the increasing need to develop renewable energy in response to stringent environmental regulations, countries worldwide are relying on solar energy for generating electricity.

Globally, China leads the world in total electricity generation from renewable sources, helped by its increased allegiance in recent times to the alternative path. The dragon is followed closely by the U.S., Brazil and Canada.

Recently the Chinese government’s announcement of offering 50% refunds to the value added tax (:VAT) for sales taking place from Oct 2013 through Dec 2015 will boost the domestic solar industry. The subsidy offered by the Chinese government, which has already set a solar installation target of 35 GW by 2015, lifted Chinese solar stocks across the board.

Among the other alternative energies, the U.S. wind industry is now gradually picking up despite the fact that the second quarter of 2013 witnessed no new installations. As of Jun 30, over 1,280 MW of projects were under construction spreading across eight states: Alaska, California, Colorado, Kansas, Michigan, Nebraska, New York and Texas. (Read: Behind the Surge in the Wind Power ETF)

ETFs to Tap the Sector

For investors seeking to play this trend in ETF form, the following series of alternative energy ETFs could make for interesting picks:

WilderHill Clean Energy Portfolio (PBW)

Launched in March 2005, PBW tracks the Wilderhill Clean Energy Index and manages an asset base of $213.5 million which it invests in a portfolio of 51 stocks.

It is well diversified across various sectors. Information Technology takes the top spot with a 46.46% allocation followed by Industrials (20.39%) and Materials (10.78%).

The fund’s top 10 holdings jointly contribute 28.08% towards the fund. The product invests almost 90% in companies related to cleaner energy and it charges a hefty 70 basis points in fees.

PBW has rewarded investors with solid returns of 61.41% over the past one year.

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 comprising solar power, bio energy, wind power, hydro power and geothermal energy.

The fund holds about 31 stocks in its pocket and has assets under management of $92.9 million and charges an expense ratio of 62 basis points annually. The fund is liquid with 14,580 shares changing hands in a day on an average.

Apart from robust holdings in the U.S., the product offers solid exposure to Europe and some Asian countries. Again, Industrials, Information Technology and Utilities take the top three spots, adding 83.8% in sector holdings. Further, the fund’s top 10 holdings jointly contribute 63.58% to the fund. Tesla Motors Inc. (TSLA), Eaton Corp. (ETN) and Cree Inc. (CREE) are the top three holdings, with 30.84% of asset allocation in total.

Global Clean Energy Portfolio (PBD)

This ETF follows the WilderHill New Energy Global Innovation Index, giving investors exposure to about 97 companies that are engaged in renewable sources of energy and technologies facilitating cleaner energy.

Assets under management come in at just over $78.9 million and this ETF charges investors 75 basis points a year in fees. In terms of performance, PBD has rewarded investors with solid returns of 48.78% year to date.

PBD is heavy in Information Technology, as this represents 35.21% of the fund. This is followed by Industrials (29.63%) and Utilities (20.17%). In terms of countries, the U.S. dominates with 36.03% followed by China having 13.13%.

First Trust Nasdaq Clean Energy Green Energy Index (QCLN)

This ETF tracks the NASDAQ Clean Edge Green Energy Index and follows a benchmark of clean energy companies, giving exposure to 43 companies in total with an asset base of $79.6 million. The fund charges investors 60 basis points a year in fees for the exposure. The top 10 holdings comprise 58.27% of the total fund. Importantly, this product has rewarded investors with a solid return of 77.20% so far this year.

Technology firms dominate this ETF, accounting for 37.66% of the assets. Beyond technology though, Oil and Gas stocks make up about 22.80%, while Industrials, Consumer Goods and Utilities hold 18.73%, 7.57% and 7.44%, respectively. In terms of geographical diversification, the fund is almost entirely focused on the U.S. market.

iShares Global Clean Energy ETF (ICLN)

This ETF tracks the S&P Global Clean Energy Index with 32 holdings and an asset base of $44.1 million. ICLN has given impressive returns of 46.84% on a year-to-date basis and charges investors 48 basis points a year in fees for the exposure.

In terms of geographical breakdown, Japan leads the list with 20.86%, while China holds the second spot with 17.55%. The U.S. comes third occupying 13.73% of the holdings. ICLN is more inclined toward electric utilities, representing 25.33% of the fund, though semiconductor and semiconductor equipment (23.20%), independent power producers and energy traders (21.57%) and electrical equipment (16.95%) all receive big chunks as well. The fund appears to be highly concentrated in the top 10 holdings with a share of 50.51%.

Bottom Line

Since the pulse of the alternative energy industry is closely tied to the swings in the macro-economy, until the picture becomes rosier we do not expect to witness many stand-alone alternative energy companies.

As per the Energy Information Administration (EIA), renewable generating capacity will account for nearly one-fifth of total capacity in 2040. Of this, solar generation will be the primary contributor to renewable capacity growth, with wind capacity occupying the second spot.

Recent moves in the sector have been encouraging, and if these trends continue, there are clearly more gains that can be had for risk-tolerant investors looking for a new play in the space.

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