Producing electric power from the wind or sun has always seemed like a great idea, but in reality, it often turns out to be impractical and difficult to make profitable. So it goes as well for investors. Short of owning your own windmill, there have been precious few options for those seeking to capitalize on the current groundswell of interest in alternative energy and environmentally friendly technologies.
Dozens of publicly held companies engage in all sorts of ventures from geothermal power plants to hydrogen fuel cells, yet buying their shares means betting on a single company's approach—highly risky even for those with a strong understanding of the company's technology and competitive position.
While there are numerous mutual funds that are marketed as "socially responsible investments," they usually don't target alternative energy per se and often own shares of larger companies that have nothing to do with alternative energy.
A Host of New Indexes
Recognizing the problem, Wall Street is moving to satisfy investor cravings for a way to play the alternative energy story. The launch of new exchange-traded funds (ETFs) gives investors exposure to alternative energy companies in a straightforward, cost-effective way, yet without the risk of investing in any one of them individually. Several such ETFs were unveiled this year, and more are in development. (Standard & Poor's Index Services, an entity that operates independently of S&P Equity Research Services, launched the S&P Global Alternative Energy index on Aug. 13.)
As of mid-2007 there were at least five ETFs focused heavily on alternative energy, and a host of new indexes that let investors track the performance of the industry as a whole, as well as sub-segments like energy generation or foreign storage companies.
On May 9, Market Vectors Global Alternative Energy ETF (GEX) started trading on the New York Stock exchange. The fund, owned by Van Eck, tracks the Ardour Global index (Extra Liquid), which is comprised of stocks in 30 publicly traded companies engaged in alternative energy production. The New York Mercantile Exchange is planning to list a futures contract tied to the Ardour index as well.
Clean Energy Portfolio
Van Eck's new ETF will have to compete with the granddaddy of alternative energy ETFs, PowerShares WilderHill Clean Energy (PBW). It tracks the WilderHill Clean Energy index, which is composed of 40 companies involved in alternative energy production or technology, none of which represents more than 4% of the total. The Clean Energy Portfolio has a market capitalization of almost $1 billion, and the Chicago Climate Futures Exchange plans to list futures on the index later in 2007.
PowerShares also markets another ETF based on a WilderHill index, the Progressive Energy Portfolio (PUW), which includes companies with products that lessen the environmental impact of existing fuel sources and improves the efficiency of their use. It started trading in October, 2006, and has a market capitalization of about $30 million.
PowerShares has a third alternative energy-related ETF, the Cleantech Portfolio (PZD), which tracks the Cleantech index published by Cleantech Venture Network. The $22 million ETF tracks about 50 companies including alternative energy, water resources and purification, advanced materials, and logistics.
More ETFs on the Horizon
The First Trust NASDAQ Clean Edge ETF (QCLN), which started trading in February, covers five sub-sectors of the alternative energy industry: renewable power generation, renewable fuels, energy storage and conversion, energy intelligence, and advanced energy-related materials. It has a market capitalization of about $20 million.
Several other alternative energy indexes have been announced that may lead to new ETFs in the future. New York investment bank Jefferies & Co. started publishing three Clean Technology indexes (one composite, one focused on energy generation, and another on energy storage) in December, 2006, which may attract an ETF sponsor.