ETF Talk: The Answer is Blowin’ in the Wind
By Doug Fabian
You likely have heard about the potential of wind power but you may not know about its potential as an investment. Wind power is becoming a favorite among those who favor “going green,” so I think this alternative energy sector is worth addressing. Just as last week’s ETF Talk featured solar energy as an area to watch but not invest in now, wind power companies belong in the same category. The First Trust Global Wind Energy (FAN) is a wind energy exchange-traded fund (ETF) that I am tracking.
Even though I am not recommending the fund at this point in time, I want to make you aware that FAN exists in case circumstances change, such as the government unexpectedly offering big subsidies for the use of wind energy. Whether you agree with such subsidies, our role as investors is to assess the opportunities in the market and put our precious savings where we expect to earn the best return for the least amount of risk.
FAN is a non-diversified fund that seeks results which, before fees and expenses, correspond generally with the performance of an index that tracks public companies worldwide with products and services engaged in the wind energy industry. While FAN has risen 8.74% so far this year and has a 1.5% dividend, the fund still is recovering from a big tumble during May, June and July 2012 (see the graph below). In addition, keep in mind that even a single wind turbine is an enormous upfront investment.
These titanic towers take a significant amount of resources to transport to their site of use. The turbines then must be constructed. Also, consider that individual towers cannot be positioned too close to each other to be effective. Since wind farms generally have many turbines, they take up a lot of space. And that ground cannot be used for other purposes, namely agriculture and housing.
FAN invests 62.12% of its assets in the utilities sector and 34.13% in the industrials sector, leaving only 3.01% for the energy sector. (The last 0.73% is in consumer cyclicals.) This small investment in actual energy sector companies shows just how costly the initial investment in wind energy is. While wind farms may slowly be able to generate gains, the fact remains that most other investments are better for your money.
This ETF’s top ten holdings comprise 58.1% of its total assets, and they are very rarely traded on U.S. exchanges, if at all. The top five companies held, in order, are: China Longyuan, 8.29%; Nordex, 7.49%; Iberdrola SA, 7.14%; EDP Renovaveis SA, 7.09%; and Gamesa Corporacion Tecnologica, S.A., 5.93%.
With the housing rebound gaining ground, expect that sector, along with agriculture, to compete for the use of land that otherwise may be available for wind farms. Factor in the volatility demonstrated in the graph above, as well as the reality that traditional fossil fuels are expected to drop in price in the near future. Then add the staggering initial costs to erect wind farms. The truth is that wind energy is still a nascent industry. As a result, wind energy is currently not an attractive investment.
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