Did Germany Just Bring Sexy Back To Green ETFs?

By Dennis Hudachek,

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After all, Germany did say it will turn to more renewables such as wind, solar and hydropower for future energy needs. And the news follows Switzerland's announcement last week that it's also planning on phasing out nuclear power by 2032.

Those dates are a long way off, but many are wondering:Will this jump-start the renewables industry and, by extension, the ETFs targeting the space?

It's too soon to jump to any conclusions. After all, several countries, including the United States, China and France, have each reiterated their stances toward pursuing nuclear programs.

Renewable energy is also heavily dependent on high oil prices and government subsidies, the latter of which could face trouble as European governments impose various austerity measures to cope with the sovereign debt crisis.

Still, this is a significant development. Germany is an economic powerhouse in Europe, and currently gets almost a quarter of its energy supply from nuclear power. It's also a pioneer in renewable energy-it already gets almost 17 percent of its energy from renewable sources.

Germany would need to more than double its renewable energy output to make up for the shuttering of its electronuclear industry. With an 11-year nuclear phaseout planned, it needs to add 2 percent of its power capacity in renewables per year, on average, over the next decade.

For investors bullish on the industry and looking to gain exposure, there are several ETFs designed to benefit from a global shift to renewables.

The PowerShares Global Clean Energy ETF (NYSE Arca:PBD)

PBD currently has the most comprehensive global reach in the renewable energy segment, holding companies involved in clean energy from 10 different countries. It's also the largest of the three funds I'll mention here, with $197 million in assets under management.

It has an expense ratio of 0.75 percent. This modified, equal-weighted portfolio of 97 companies aims to track the WilderHill New Energy Global Innovation Index. For investors looking for a broad, diversified global exposure to the entire industry, PBD might be the play.

The Market Vectors Alternative Energy ETF (NYSE Arca:GEX)

GEX is heavily weighted in solar, and replicates the Ardour Global Index. While this fund has lost much of its star power in the wake of the financial crisis, it was the former darling of the renewables industry. That said, it still has $148 million in assets.

GEX costs 0.60 percent and holds a market-cap-weighted portfolio of 30 companies. Top holdings include First Solar (8.95 percent) and Vestas Wind Systems (8.21 percent), the Danish wind power giant. It might be the play for investors looking for heavier concentration in several large companies (its top 10 holdings make up over 55 percent of the portfolio).

iShares S&P Global Clean Energy ETF (NYSE Arca:ICLN)

ICLN is the cheapest of the bunch, with an expense ratio of 0.48 percent. It holds a market-cap-weighted portfolio of roughly 30 companies and aims to track the S&P Global Clean Energy Index.

The fund is the smallest of the three, with roughly $73 million in assets. It's gotten little love from investors, though that might be because it is the newest of the bunch-first-mover status is especially important with these theme-based, niche funds. However, ICLN provides a diversified exposure to clean energy companies from 10 different countries.

Other Considerations

There are a few additional factors to consider when analyzing these funds. Germany's current renewable mix is tilted toward wind. More than 40 percent of its overall renewable mix in 2009 was wind, and it's planning on even more wind farms in the wake of the nuclear incident in Japan.

Of the ETFs named here, GEX and ICLN have significant exposure to wind-almost 20 percent-and may benefit if Germany becomes a major driver of marginal renewable energy demand going forward.

Alternatively, ICLN has the largest tilt toward Europe and German firms-39 percent and 7.5 percent, respectively, which might benefit it if there is some sort of home bias in resource allocation.

What Germany and Switzerland make clear is that the ongoing nuclear crisis in Japan following the earthquake and tsunami on March 11 has governments around the world questioning nuclear power. And after Germany's announcement over the weekend, the three funds all posted big gains yesterday of more than 3 percent, though not on any significant increase in volume.

For those investors who like the news coming out of Germany and want direct exposure to the sector, ETFs continue to provide a cheap, practical way to gain exposure (especially in a developing sector where picking individual companies can be risky).

So did Germany really just bring sexy back to the renewable energy industry? Maybe just a little, for now.

Disclosure:I am currently long GEX.

Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2011 Index Publications LLC . All Rights Reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: GEX , ICLN

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