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Thursday, October 30, 2014

Alternative Energy ETF Investing 101 - ETF News And Commentary - Nasdaq

Alternative energy is fast catching up as a source of electricity and would well gain the second spot after coal over the coming years. This is primarily thanks to growth in wind and solar photovoltaics (PV).

The U.S. solar energy industry grew 21% year over year in the second quarter of 2014, as per the report from Solar Energy Industries Association (SEIA). This marked the fourth-largest quarter of solar installations in the history of the market, buoyed by the utility solar PV market, which grew 15.1% year over year. In the first half of 2014, 53% of all new electricity generation came from solar energy. The agency expects PV installations to reach 6.5 gigawatt (GW) this year, up 36% from 2013 and more than three times the market size just three years ago.

Again, residential solar in the U.S. is now a sizzling story. This market even outpaced the commercial and utility segments last year and has already started to attract more conventional electric power companies that mostly have coal and natural gas as their sources. As per SEIA, residential PV installation grew 45% year over year in the second quarter of 2014. (Read: 3 Clean Energy ETFs for a Green Portfolio )

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. Specially, solar trade relations have heated up lately with China, India and the U.S. trying their level best to protect homegrown interests.

Washington has once again punched new import duties on solar panels and other related products from China. The latest move therefore marks a flare up in the U.S.-China trade conflict that has been simmering since 2012. Extra duties will now be imposed on both cells and final solar panel products. 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. (read: 3 China ETFs Surging Higher )

While the U.S. and China have been playing a big role in recent years in driving the industry, other nations are also pushing hard for home-grown solar generation capacity as a remedial measure to solve their electricity crisis. The latest to join this list is Asia's third largest economy, India. The newly formed pro-business Modi government now has an ambitious plan of connecting all Indian households with solar energy by 2019. Until the Indian producers come of age and compete with the global players on an equal footing, the non-levy of anti-dumping will allow the big global solar panel producers to tap this growing market.

Among the other renewable resources, the wind industry grew radically during the first half 2014. The American Wind Energy Association (AWEA) reported that this industry installed 815 MW during the first half of 2014, up significantly from what it installed during the first three quarters of 2013. EIA expects wind capacity to expand 9.2% in 2014 and 16.2% at the end of 2015 (read: Alt-Energy Up on Emerging Markets ).

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. (See all Alternative Energy ETFs here )

WilderHill Clean Energy Portfolio ( PBW )

Launched in March 2005, PBW tracks the WilderHill Clean Energy Index and manages an asset base of $170.8 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 43.41% allocation followed by Industrials (24.42%) and Utilities (9.69%).

The fund's top 10 holdings jointly contribute 24.64%. 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. Average daily volume is at 11,613 shares.

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 37.2% and 36.7%, while consumer discretionary and utilities round off the next two spots with nearly 13% and 11%, respectively. Further, the fund's top 10 holdings jointly contribute 62.54% to the fund. Eaton Corp. (ETN), Tesla Motors Inc. (TSLA) and Vestas Wind Systems A/S, are the top three holdings, with 30.93% 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 came in at just over $80 million and this ETF charges investors 75 basis points a year in fees. In terms of performance, PBD has rewarded investors with returns of 7.8% in a one-year span. The fund's top 10 holdings contribute 17.66% to it.

PBD is heavy in Information Technology, as this represents 34.15% of the fund. This is followed by Industrials (34.09%) and Utilities (19.36%). In terms of countries, the U.S. dominates with 33.78% followed by China with 13.92%.

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 50 such companies in total with an asset base of $120 million. The fund charges investors 60 basis points a year in fees for the exposure. The top 10 holdings comprise 57.52% of the total fund. Importantly, this product has rewarded investors with a one-year return of 13.71%.

Technology firms dominate this ETF, accounting for 36.78% of the assets. Beyond technology, Oil and Gas stocks make up about 26.34%, while Industrials, Consumer Goods and Consumer Services hold 16.93%, 8.88% and 6.32%, 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 31 holdings and an asset base of $63 million. ICLN has given a one-year return of 8.39% and charges investors 48 basis points a year in fees for the exposure.

In terms of geographical breakdown, U.S. leads the list with 23.95%, while Hong Kong holds the second spot with 18.51%. China takes the third spot occupying 17.37% of the holdings. ICLN is more inclined toward Semiconductors & Semiconductor equipment, representing 32.87% of the fund, though Independent Power and Renewable Electric (20.63%), Electrical Equipment (19.07%), and Electric Utilities (13.20%) receive big chunks as well. The fund appears to be highly concentrated on the top 10 holdings with a share of 52.72%.

Bottom Line

The demand for renewable energy, in particular solar and wind, is rapidly growing for electricity generation in the U.S. As per the U.S. Energy Information Administration (EIA), renewable electricity generation in the U.S. would grow 69% over 28 years (from 2012-2040).

The depletion of fossil fuel reserves, higher oil and gas prices, new and advanced technologies, accompanied with more competent alternative energy applications have made green power more feasible, injecting optimism into the sector. However, the fresh ruling on anti-dumping duties, which had earlier ruined many solar companies, raises concern over the future of the industry as a whole.

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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 The NASDAQ OMX Group, Inc.


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