Drop in the Guggenheim Solar Energy ETF Over the Past Year: 80%
It's tough to think of an investment with more feel-good value than renewable energy. What's not to like about an industry that seems to offer a solution to some of the world's biggest problems? Renewable energy is safer and more environmentally friendly than, say, nuclear reactors or fossil fuels. If it were to reach its full promise someday it could mean less geopolitical conflict over oil. Renewable energy is available almost everywhere since it comes, by definition, from natural resources that are self-perpetuating: sunlight, wind, rain, tides and geothermal heat.
Photograph by Ian Waldie/Bloomberg
Why It Matters
While renewable energy accounts for only about 9 percent of the global energy market, wind-generated capacity has doubled globally in the past three years. The number of solar installations nearly doubled in 2011 alone. Some forecasts, including one by the European Renewable Energy Council, have renewables capturing 50 percent of the market by mid-century. European governments are aiming for it to account for 20 percent of overall consumption by 2020. China has a 2020 goal of 15 percent. While the industry is heavily subsidized, investing in it can be risky, as seen in the sharp drop in renewable energy ETF performance.
Graphic by Charlos Gary/Bloomberg
What It Means for Your Portfolio
Good intentions don't always translate into good investments. Taxpayer-funded subsidies have diminished as governments struggle with budget problems, even in countries such as Germany and Spain, which have been on the solar-subsidy forefront. Oil prices have dropped 18 percent since mid-March and could move lower, making renewable less attractive. A fracking-driven natural gas boom could do the same thing. As well, the sector is hyper-competitive, as Chinese factories have undercut foreign competitors in the production of solar panels. (That said, new U.S. tariffs imposed on Chinese companies could help American rivals.) Renewable energy, in short, may not be much of a moneymaker anytime soon.
Photograph by Qilai Shen/Bloomberg