Credit: Shutterstock photoThe majority of the investment community has been focusing heavily on the deflation in crude oil and natural gas prices along with the concomitant decline in energy-related stocks. The Energy Select Sector SPDR (XLE) is easily the worst performing major market segment of 2014, which is no surprise considering the specter of shrinking profits weighing on these integrated oil companies.
The bigger revelation this year may be the contraction in “clean energy” stocks, which enjoyed fantastic gains in 2013 on the back of growing social consciousness and a supposed industrial revolution. Clean energy companies are generally those which are focused on technology for solar, wind, electric, battery, or other renewable sources of power.
The PowerShares WilderHill Clean Energy Portfolio (PBW) is composed of 53 diversified holdings engaged in greener energy efforts. The portfolio of this unique ETF is primarily made up of small cap technology and industrial companies. PBW has fallen more than 14% this year, after gaining an astounding 60% in 2013.
The First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) is another example of a basket of 50 clean energy companies that is hovering in the red this year. The QCLN portfolio is more heavily weighted towards solar companies, which have held up better than other related areas of this burgeoning industry group. This ETF even has substantial exposure to Tesla Motors (TSLA) as a function of their commitment to environmentally friendly electric vehicles.
Despite the lack of direct correlation, the continued decline of traditional energy prices may be weighing on the prospects for clean energy solutions in the near-term. Cheaper oil and gas prices mean less emphasis on cost savings from electric cars, solar utility installations, and other renewable energy sources.
So where does this industry go from here and how can you profit from it?
From a technical perspective, the clean energy space appears to have worked off the overabundance of enthusiasm it garnered in 2013. However, that doesn’t mean these stocks are out of the woods yet. The declining 50 and 200-day moving averages in the chart of PBW is a worrisome sign for market technicians. Ideally this ETF needs to regain some semblance of upward momentum in order to bolster confidence that a trend change has taken place.
Exchange-traded funds such as PBW and QCLN will have the potential to attract value-seeking investors looking to capitalize on another growth spurt in this industry if the economic conditions remain favorable. The low interest rate environment is certainly conducive to help these companies along. However, the real driver behind capital flows to this arena may be further development to reduce costs of emerging technologies. This will allow clean energy to compete on a more level playing field with conventional alternatives.
Two other funds that deserve mention in this space are the Guggenheim Solar ETF (TAN) and MarketVectors Global Alternative Energy ETF (GEX).
TAN is the industry leader in total assets with nearly $300 million spread amongst 29 global solar companies. The United States makes up just half of the country allocation in TAN, while China and Hong Kong round out the top spots. The asset allocation of companies within TAN is market cap weighted and follow a passive index approach.
GEX is also a global-focused index of 30 companies in the alternative energy field. This ETF is primarily made up of large and mid-cap stocks and has total assets of $84 million. While focused on a narrow segment of companies, GEX will provide more international exposure than a U.S.-focused fund such as PBW.
Ultimately the clean energy theme is one of high growth potential with some short-term hurdles to overcome. It will be interesting to watch how this industry continues to evolve through 2015 and beyond.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
