Alternative Energy ETFs: Eventually We Will Run Out of Oil and Gas

The number of alternative energy exchange traded funds (ETF) is slowly increasing. The first one I heard about came from PowerShares in the form of their WilderHill Clean Enery Portfolio offering. Although in the last month this ETF has shed around 15%, there are still some people who might consider this a worthy investment.

This offering from PowerShares is based on the WilderHill Clean Energy Index whose purpose is to deliver capital appreciation by investing in companies that focus on “greener” and renewable sources of energy along with companies that develop technologies that enable cleaner energy use. This ETF uses equal-weightings and due to the nature of the underlying companies actually turns out to be a small-cap (63%) play with a bit of mid-cap (17%) thrown in to the mix. In terms of sector allocation, much of the portfolio is invested in industrials and information technology.

PowerShares has two others as well: the Cleantech Portfolio and the Progressive Energy Portfolio. The Cleantech portfolio tracks companies that that produce any product or service whose purpose is to improve the operation, performance, productivity, or efficiency, while reducing costs, inputs, energy consumption, waste or pollution. The only company in the top-10 holdings that I recognize is Ballard Power Systems. And about 78% of the holdings are small-caps. On the other hand, the Progressive Energy Portfolio holds companies that are “significantly involved in transitional energy bridge technologies, with an emphasis on improving the use of fossil fuels.” I'm not entirely sure what the means so I'll have to do a little more digging. This offering has 25% of its value in mid-cap stocks and 61% in small-cap.

Some reasons why an investor would want to consider ETFs for alternative energy in general and clean energy in particular include (identified by Brett Steenbarger):

  • Largely due to the complications in Iraq, U.S. citizens are looking to energy independence as a response to national security that will supplant the recent paradigm of unilateral interventionism.
  • Clean energy is a natural response to concerns over global warming that will help us re-establish ties with ecologically concerned allies abroad.
  • Clean energy is no longer a pipe dream, as the average consumer is now familiar with ethanol and hybrid engines–not to mention higher fuel prices.
  • Energy independence is increasingly seen as a way of taking us out of thorny competitions for resources with Russia, China, India, and developing nations.
  • Most important of all, clean energy has become as American as apple pie. Republicans are looking to launch a large initiative and Democrats are ready to make global warming a national priority.

So are these exchange traded funds I would invest in? No. I admire these types of companies and hope they'll achieve great success. And the world would certainly benefit from such success. But my investment style precludes such narrowly focused ETFs.

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1 Comment

  1. Good analysis. I think the best reason to have a small amount of your discretionary investment $s in these ETFs is the Supreme Court's decision on 4/2/07 vis a vis Massachusetts v. the EPA, where they ruled the EPA should regulate CO2 emissions.

    I think this ruling gives the green light to the "greenies" (no pun intended) to force (i.e sue) companies to implement "green technologies".

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