Hated Sector; Big Potential

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Renewable energy probably tops the list as one of the most hated and worst-performing sectors. Still, as an investor, I can't help but see some opportunities today.

It's no surprise that a number of ETFs are on the market to invest in the sector, and they're different enough from one another to merit more careful consideration. But first, a bit of background is in order.

It's understandable why renewable energy is being shunned like the plague. Since the financial crisis of 2008, developed-country governments are mired in debt. Why would anyone touch a sector dependent on government subsidies to survive?

Not only is Europe drowning in debt, subsidies for solar and wind are set to expire soon here in the U.S. unless they're extended.

Then of course we've had advances in energy drilling technology-mainly hydraulic fracturing-that have made the U.S. an oil and gas powerhouse once again, pushing down natural gas prices to record lows and making wind or solar considerably less attractive.

Common sense tells us to stay away from renewables at all costs. There really is very little reason why investors would flush money down the drain investing in such an overhyped, uneconomical sector, right?

Based on all the negativity I'm reading in the media, I too, see little reason to invest in the space. And the presidential election coming up in a few weeks only adds uncertainty to the sector as a whole.

Markets obviously feel the same way. Many companies engaged in the renewable energy space are trading at or near 52-week lows, with some trading at all-time lows.

If you look at the returns of all renewable energy ETFs, you get a sense of just how much these funds have been money drains over the past several years and, for the most part, since their inceptions.

Now buying a stock simply because it's gotten hit hard might be the single dumbest reason to buy it. Trading a stock at a 52-week low to play a turnaround in a downtrend is certainly a fool's errand.

I still remember what my boss used to tell me back when I was an equities trader:"You know what happens when a stock hits a 52-week low, right? It goes even lower."

Still, I think you have to separate trading from investing here. As an investor focused on the long term, and with the renewable energy sector the brunt of one-sided pessimism and extreme negativity, I wonder if there are some bargains out there.

It's important to remember that markets are forward looking. Well before the public's final acceptance of the "demise" of renewable energy, stock prices will likely have bottomed.

In fact, this may have already happened for some companies.

Investment themes and popular trends also change over the course of years. Back in early 2001, did you think gold was a good buy when it was trading for $260 an ounce? What about emerging markets in the late 1990s? We all know what happened from there.

I'm not saying that some bigger themes will change anytime soon.

But central banks are flooding the world with liquidity, and all that money can very likely show up in commodities, including oil. And a spike in oil prices is exactly what renewable energy needs to make sense economically.

Let's also not forget that in the wake of 2011's Fukushima nuclear disaster, Japan and Germany- the world's third- and fourth-largest economies, respectively-a re looking to rid themselves of nuclear power in the coming decades.

As for the United States, as much as pundits are predicting catastrophe because of our debt problems, I still think the U.S. is the place to invest in the sector. Europe is in even worse shape than the U.S., and I still think the innovation here is unmatched if the need for such innovation becomes imperative.

ETF Plays

The PowerShares WilderHill Clean Energy Portfolio (NYSEArca:PBW) is the oldest and most established in the space, with over $129 million in assets under management. PBW holds a broad assortment of U.S.-listed companies engaged in the renewable energy space.

Beyond just solar, PBW's broad holdings base includes wind, smart grid, geothermal, rare earths and biofuels companies. The fund is mainly focused on U.S. companies, but the key phrase here is "U.S.-listed."

This means PBW holds ADRs of some prominent foreign firms, such as Brazilian sugar ethanol giant Cosan, and the world's largest miner of lithium, Chemical & Mining Company of Chile.

Another U.S.-listed focused ETF with less exposure to ADRs is the First Trust Nasdaq Clean Edge Green Energy Index Fund (NasdaqGM:QCLN).

Of course if oil prices rocket to the moon, ETFs focused on unconventional energy companies should do well too. Immediately coming to mind is Van Eck's Market Vectors Unconventional Oil & Gas ETF (NYSEArca:FRAK). Investing in unconventional oil and gas is probably one step ahead of jumping into renewables.

The PowerShares WilderHill Progressive Energy Portfolio (NYSEArca:PUW) also holds an assortment of companies engaged in bridging us over to the next energy revolution, and includes nuclear, natural gas and gas-to-liquids investments.

Takeaway

It's important to remember that renewable energy is highly speculative, and this isn't a sector to bet the farm on. If you can't stomach losing a chunk of your principal in a short period of time, it's probably best to stay away.

But for those in it for the long haul, who can set aside multiple lots to enter the sector gradually as it's getting beaten down, then ETFs like PBW and QCLN provide some real options.

While it's impossible to predict the next big thing, if the additional liquidity stemming from the Fed's latest round of quantitative easing creates a surge in oil prices, renewables look ripe here for potential on the upside.

More broadly, would anyone rule out a renewable energy mania at some point in our lives?

In such an environment, renewable energy ETFs currently left for dead could eventually become some of the best-performing funds.

At the time this article was written, the author held a long position in PBW. Contact Dennis Hudachek at dhudachek@indexuniverse.com.


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



This article appears in: Investing , ETFs

Referenced Stocks: FRAK , PBW , PUW , QCLN

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