Tom Lydon's Earth Day Guide to Green ETFs

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Tom Lydon submits:

Although there won't be a climate change bill coming through today, the White House says that such a bill would be "doable" sometime this year. Matthew Daly for Associated Press reports that members of Congress increasingly understand the need to develop clean energy that does not emit carbon dioxide and other pollutants blamed for global warming.


A bill will be introduced on Monday that would apply different carbon controls to different sectors of the economy, without a broad cap-and-trade approach. It aims to cut emissions of pollution-causing greenhouse gases 17% below 2005 levels by 2020. It also likely will expand domestic production of oil, natural gas and nuclear power, thus weaning ourselves off oil dependence and implementing the greater use of clean fuel sources.

Let's face it: there's a lot of cleaning up to be done, and room for growth spells an opportunity. What are some of the negative effects of climate change that we need to offset?

  • How serious is a warming of a few degrees? The increases may appear minor compared to short-term weather changes from night to day and winter to summer. In global climate terms, however, warming at this rate would be much larger and faster than any of the climate changes over at least the past 10,000 years.
  • How will climate change affect ecosystems? As the climate continues to warm, major changes may occur in ecosystem structure and function, species' ecological interactions, and species' geographic ranges, with predominantly negative consequences for biodiversity. Migration patterns and habitats will also be altered forever.
  • How will climate change affect human health? Longer, more intense and frequent heat waves may cause more heat-related death and illness. There is virtual certainty of declining air quality in cities since greater heat can also worsen air pollution such as ozone or smog. Insect-borne illnesses are also likely to increase as many insect ranges expand.

Alternative energy ETFs are becoming increasingly popular, but they haven't exactly been lighting the markets on fire lately. Why? Many of the companies making up these funds are still in the early stages of development. For that reason, there's a prevailing feeling that investment in the green energy sector is more of a long-term story than an immediate opportunity. As the story plays out, these are some of the ETFs that may be telling it:

Broad ETFs

  • PowerShares WilderHill Clean Energy ( PBW ): Holds companies involved in green energy across the spectrum - solar power, fuel cell development, and other technologies that promote green energy development and use.
  • Market Vectors Global Alternative Energy ETF ( GEX): GEX holds companies that derive 50% of their revenues from the alternative energy industry, including water, solar and wind. It's most heavily invested in the United States, which has 44% of the weighting. Denmark, Spain and Germany all have weightings around 9%.

Solar Power : Solar energy is nothing new, but it remains one of the "big ideas" nonetheless. Money is needed to get many of the larger new projects up and running, while many of the smaller companies are scrambling to get noticed. There could be a need for these companies, too: by 2030, 1.3 billion people around the world will still be without power. Major national players in the solar energy field include Germany and China.

  • Claymore/MAC Global Solar Energy ( TAN ): Heaviest weights are in China, Germany and the United States; the largest solar ETF
  • Market Vectors Solar Energy ETF ( KWT ): Heaviest weights are in United States, China and Germany; has slightly fewer holdings (29) than TAN

Water : Some of the water systems in the United States are so old, they were built back during the time of the Civil War. With a pipe break a day in Washington at times, isn't it time to replace some of the water infrastructure to help maintain and protect what resource we still have? And that's to say nothing of the situation around the world - millions of people need and lack access to clean, potable water.

  • PowerShares Water Resources ( PHO ): Holdings are equally distributed between large-cap value, mid-cap growth and small-cap growth. More than 77% of this fund is allocated to industrials; PIO has a lower allocation to the sector, and a bigger one to utilities.
  • PowerShares Global Water ( PIO ): Has its biggest exposure to the United States, with 33% of the weighting, followed by Japan, France and the United Kingdom.
  • Claymore S&P Global Water ( CGW ): Most of this fund's 50 securities are based in the United States, but Britain and France also make an appearance. Utilities and industrials are the biggest sectors.
  • First Trust ISE Water Index ( FIW ) : Holds 36 stocks from around the world; the heaviest sector weights are in industrials, materials and utilities.

Wind : There's been a push here to get more Americans on this type of power. The U.S. Department of Energy has announced a goal of obtaining 6% of U.S. electricity from wind by 2020 - a goal that is consistent with the current rate of growth of wind energy nationwide. It is likely that wind energy will provide a growing portion of the nation's energy supply, especially as the public demands clean energy and as the costs become lower.

  • First Trust Global Wind Energy ( FAN ): Biggest country weightings are in Spain, the United States and Germany, and is mostly invested in utilities and industrials.
  • PowerShares Global Wind Energy ( PWND ): Largest allocation is to mid-cap growth companies, but 20% is small-cap growth and 25% is large-cap growth; heaviest country weightings are in France, Spain and Denmark.

Nuclear Energy : The White House has guaranteed more than $8 billion in loan guarantees for funding construction of two new nuclear reactors, and Richard Phillips, senior index analyst at New York-based S-Network, says that around the world "there are more than 200 new nuclear reactors under order, and many more are expected to come."

  • Market Vectors Nuclear Energy ( NLR ): Holds uranium miners, nuclear generation, plant infrastructure, uranium storage and more.
  • PowerShares Global Nuclear ( PKN ): Heaviest weightings are in United States, Japan and Canada and has a primarily large-cap bent; greatest exposure is to industrials, utilities and energy.
  • iShares S&P Global Nuclear Energy ( NUCL ): Biggest sector weighting is in electric utilities, which make up nearly half the fund's assets; oil, gas and construction round out the top weightings.

Bear in mind that the broader ETFs pose less risk, while the sector-focused ones may show more volatility as their respective sectors go through the stages of growth. Use a trend following strategy to find and capitalize on these opportunities, but be sure to have a stop loss, especially since we're dealing with relatively young industries. [ How to Follow Trends. ]

Disclosure: None

See also 6 ETFs to Watch as Greek Drama Unfolds on seekingalpha.com



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 , Stocks


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