Green investing is a big thing, and rightly so. I am sorry to upset the climate change deniers, but a rational review of the evidence points to the fact that the Earth is warming. Those who maintain that this is part of the natural variations in a planet’s climate may have a point, even if the vast majority of climatologists disagree, but from an investor’s perspective, who is right in that political debate is irrelevant. What counts is what people believe, and on that score, the “it’s all our fault” argument wins.
The fact is that clean energy and the like are attracting cash. Not just from consumers, but also investors. There are a number of ETFs that invest in green energy companies, and all of them have had a good year. In general, those with a focus on the US have done better this year, but I believe this is the result of two extraordinary factors, and those looking to jump on the bandwagon may be best served by taking a more global approach.
Many of the ETFs in the sector are specific to particular types of green energy, such as wind, solar and nuclear, but I am focused more on the general green funds. Let’s compare four of the most popular’
First Trust Nasdaq Clean Energy Green Energy Index (QCLN):
- 1 Year Performance: +58.44%
- Top Holdings: 97% US equities of differing market caps. Somewhat concentrated, with the top 5 holdings accounting for nearly 40% of the fund.
- Expense Ratio: 0.60%
Powershares Widerhill Clean Energy Portfolio (PBW):
- 1 Year Performance: +30.39%
- Top Holdings: 78% US equities of differing market caps. Less weighted toward Tesla (TSLA) than others
- Expense Ratio: 0.76%
Market Vectors Global Alternative Energy ETF (GEX):
- 1 Year Performance: +58.36%
- Top Holdings: 54.2% US equities with the top 5 holdings accounting for around 43% of the portfolio
- Expense Ratio: 0.81%
Powershares Global Clean Energy Portfolio (PBD)
- 1 Year Performance: +41.37%
- Top Holdings: 38.2% US, with the top 5 accounting for just over 10% of the fund
- Expense Ratio: 0.75%
Those with more concentrated US holdings have done better this year because of two specific factors. First, many have oversized holdings in Tesla (TSLA), which has seen gains of over 400% in the last year. Second, there has been a general catching up by US green energy companies as government subsidies have come on line, and the consumer has begun to look for alternatives to fossil fuels.
I believe, however, that both of these drivers are slowing, and that the best long term performance will come from funds with an international focus. There is more awareness of clean energy in the US for sure, but still nowhere near as much as in other parts of the world. Whenever I return to Europe this strikes me. People there are aware of and discuss their “carbon footprint” and the American climate change deniers are seen by most as further evidence that there is something strange about people on the other side of the Atlantic.
Add to this acceptance the fact that renewable energy is being embraced by many Third World and developing countries out of necessity (fossil fuels are expensive if you have to import them), and I have to wonder for how much longer renewable energy will be seen as “alternative” in much of the non-US world. Now that the US based funds have caught up, the better growth prospects over the next few years would seem to be in the international markets.
Because of this, and because it is more diversified than the others, my pick in the sector would be PBD.
From a technical perspective, it would seem that PBD is continuing a pattern of higher lows and higher highs, and the recent pull-back as the overall market fell was stopped at the 50 day moving average and may well prove to be a good opportunity to buy.
Given the political climate around the world, it is unlikely that support, both public and private, for renewable energy technologies and producers will decline anytime soon. This may be one of those happy times when selfish financial interests and altruistic concerns for the health of the planet coincide. We can all tell our friends that we are investing to save the world while we watch our account grow. I don’t know about you, but that scenario quite appeals to me.