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A Primer on Alternate Energy ETFs - ETF News And Commentary


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Alternative energy, green power solutions as they are called, is the most discussed topic these days given the ardent attempt to combat global warming worldwide.

Solar and wind are gradually transforming the way we produce and consume energy, driving the ongoing global energy transition. Although some better-established sources of alternative energy - hydro, wind, biomass and waste, not to mention solar photovoltaics ("PV") - are supported extensively, niche renewable energy sources such as geothermal and concentrated solar power are also on the rise, natural conditions permitting.

Per the latest report released by the Solar Energy Industries Association ("SEIA"), the U.S. solar energy industry grew 41% year over year to reach 1,354 megawatt ("MW") in the third quarter of 2014. This marked the second-largest quarter of solar installations in the history of the market, buoyed by the utility solar PV market. As of Sep 2014, more than 36% of all new electricity generation came from solar energy (read: Will Solar ETFs Shine on Apple-First Solar Deal? ).

In addition, the current U.S. administration's efforts to restrict carbon emissions are a net positive for renewable energy stocks. A proposed Clean Power Plan of the Environmental Protection Agency would reduce carbon emission from power plants by 30% by 2030, compared to the levels in 2005. Again, President Barack Obama's fiscal 2016 budget proposal, unveiled on Feb 2, seeks an approximate 7.2% rise in funding for clean energy (read: Obama Budget Plan Drives Up These Sector ETFs ).

The U.S. Energy Information Administration ("EIA") expects utility-scale solar capacity to expand over 60% between the end of 2014 and the end of 2016 (read: Green & Dirty ETFs to Watch on Clean Climate Push ).

Residential solar in the U.S. is also a sizzling story. This market has begun to attract more conventional electric power companies that mostly have coal and natural gas as fuel sources. As per SEIA, residential PV installation grew 58% year over year in the third quarter of 2014.

Just as pro-environment regulations have given a boost to the alternative energy sector, trade conflicts between some of the major solar product manufacturing countries have complicated the landscape. Solar trade relations have particularly heated up with China and the U.S. trying their level best to protect homegrown interests.

Washington is planning to impose new import duties on solar panels and other related products from China and Taiwan. The new duties would further escalate trade tensions between the two countries at a time when the two nations were planning to work together in the common fight against global warming and carbon emissions. The U.S. believes that Chinese manufacturers have hitherto benefited from unfair subsidies offered by their government.

Globally, China, the world's prime manufacturer of solar panels, is emerging as the market leader for solar PV to meet the growing need for clean energy. While the U.S. and China have been playing a big role in recent years in driving the industry, the latest to join this list is Asia's third largest economy, India. Recently, the government in India raised its solar investment target to $100 billion by 2022. This has kindled the interest of the solar players in the Indian market (read: Renewable Energy: Opportunities to Invest? ).

Among the other renewable resources, the wind industry grew radically during the first nine months of 2014. As per EIA, wind capacity grew by 10% between 2012 and 2014 and is expected to increase by 23% between 2014 and 2016. The EIA expects wind capacity to expand twofold as compared to solar as the former is starting from a much larger base than the latter - 15 gigawatts ("GW") of wind versus 6 GW of utility-scale solar (read: Alt-Energy Stock Outlook ).

ETFs to Tap the Sector

For investors seeking to play this trend in ETF form, the following series of alternative energy ETFs could make interesting picks.

WilderHill Clean Energy Portfolio ( PBW )

Launched in March 2005, PBW tracks the WilderHill Clean Energy Index and manages an asset base of $139.3 million which it invests in a portfolio of 53 stocks.

It is well diversified across various sectors. Information Technology takes the top spot with a 41.58% allocation followed by Industrials (24.16%) and Utilities (14.86%).

The fund's top 10 holdings jointly contribute 27.32%. The product invests almost 90% in companies that are involved in the generation of cleaner energy. It charges a hefty 70 basis points in fees.

Market Vectors Global Alternative Energy ETF ( GEX )

Launched in May 2007, GEX tracks the Ardour Global Index, focusing on companies that are primarily engaged in the business of alternative energy comprising solar power, bio energy, wind power, hydro power and geothermal energy.

The fund holds about 31 stocks in its pocket, has assets under management of $95.4 million and charges an expense ratio of 62 basis points annually.

Apart from robust holdings in the U.S., the product offers solid exposure to China and some European countries. From a sector perspective, Industrials and Information Technology take the largest share with a respective 47.7% and 28%. Further, the fund's top 10 holdings jointly contribute 64.18% to the fund. Vestas Wind Systems A/S, Tesla Motors Inc. (TSLA) and Eaton Corp Plc (ETN) are the top three holdings, with 29.79% of asset allocation in total.

Global Clean Energy Portfolio ( PBD )

This ETF follows the WilderHill New Energy Global Innovation Index, giving investors exposure to about 104 companies that are engaged in renewable sources of energy and technologies facilitating cleaner energy.

Assets under management are just over $64.6 million and the expense ratio is 81 basis points a year. In terms of performance, PBD has rewarded investors with returns of 30.29% in a 3-year span. The fund's top 10 holdings contribute 19.3% to it.

PBD is heavy in Industrials, as this represents 36.81% of the fund. This is followed by Information Technology (32.11%) and Utilities (20.15%). In terms of countries, the U.S. dominates with 32.07% followed by China with 15.25%.

First Trust Nasdaq Clean Energy Green Energy Index ( QCLN )

This ETF tracks the NASDAQ Clean Edge Green Energy Index and follows a benchmark of clean energy companies, giving exposure to 48 such companies in total with an asset base of $83.3 million. The fund charges investors 60 basis points a year in fees for the exposure. The top 10 holdings comprise 57.91% of the total fund. Importantly, this product has rewarded investors with a 3-year return of 59.50%.

Technology firms dominate this ETF, accounting for 38.17% of the assets. Beyond Technology, Oil and Gas stocks make up about 22.40%, while Industrials, Consumer Services and Consumer Goods hold 17.87%, 22.40% and 17.87%, respectively. In terms of geographical diversification, the fund is almost entirely focused on the U.S. market.

iShares Global Clean Energy ETF ( ICLN )

This ETF tracks the S&P Global Clean Energy Index with 30 holdings and an asset base of $62 million. ICLN has given a 3-year return of 17.10% and charges investors 47 basis points a year in fees for the exposure.

In terms of geographical breakdown, China leads the list with 38.08%, while the U.S holds the second spot with 22.18%. ICLN is more inclined toward Semiconductors & Semiconductor Equipment, representing 33.06% of the fund, though Independent Power and Renewable Electric (22.81%), Electrical Equipment (20.72%), and Electric Utilities (11.68%) receive big chunks as well. The fund appears to be highly concentrated in the top 10 holdings with a share of 58.48%.

Bottom Line

The depletion of fossil fuel reserves, new and advanced technologies, accompanied with more competent alternative energy applications have made green power more feasible, injecting optimism into the sector. Yet, investors should closely track the political factors that could impact the sector. These include eco-friendly mandates and renewable energy agendas to see if potential benefits will spill over to the renewable companies and the sector ETFs.

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PWRSH-W CL EGY (PBW): ETF Research Reports

MKT VEC-GLBL AE (GEX): ETF Research Reports

PWRSH-GLB CL-EY (PBD): ETF Research Reports

NASDAQ-CL EDG G (QCLN): ETF Research Reports

ISHARS-GL CL EN (ICLN): ETF Research Reports

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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 Nasdaq, Inc.



This article appears in: Investing , ETFs
Referenced Symbols: TSLA , ETN , PBW , GEX , PBD



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