With oil prices held in check below the $80 mark until very recently, sluggish global growth has combined with decreasing alternative energy subsidies from cash-strapped governments to batter the alternative energy ETF market for much of 2010. While some broad based energy ETFs tracking the oil and gas sector have managed to pull themselves back into positive territory on the year, nearly all of the specialized funds targeting the alternative energy industry are still down more than 10% since the start of 2010.
Even in this clean corner of the energy market there are large disparities among the different types of funds. While broad clean energy and solar power funds are generally down about 15% on the year, wind power ETFs have performed even worse, sinking by more than 30% year-to-date. However, with the dollar slumping and more quantitative easing likely to extend the downward trend in the near future, oil prices could finally be headed higher, which could create momentum behind all alternative energy ETFs in the Energy Equities ETFdb Category. This trend could be especially positive for the beaten-down wind power funds that have been seeking a catalyst to return to higher levels [see Why Clean Energy ETFs Are No Slam Dunk].
The industry may very well find that spark come from an unlikely source, internet search giant Google. Earlier this week, Google announced a joint venture with Japanese trading house Marubeni Corp to develop an undersea power-cable line along the U.S. Atlantic coast. The funding will go towards helping an independent transmission company, Trans-Elect, build a 350-mile network along the mid-Atlantic region from New Jersey to Virginia. Google will be buying a 37.5% equity stake in the $5 billion project which is scheduled to be finished sometime in 2016. If completed, the lines would be capable of transmitting close to 6,000 MW of power, or the electricity demands for close to 1.9 million homes [also read Why Google Could Crush The Coal ETF].
The project could help to spur increased investment in the wind power industry and help to take out a lot of the risks for the sector. “The AWC (Atlantic Wind Connection) backbone is critical to more rapidly scaling up offshore wind because without it, offshore wind developers would be forced to build individual radial transmission lines from each offshore wind project to the shore, requiring additional time consuming permitting and environmental studies and making balancing the grid more difficult.” said Rick Needham, the Green Business Operations Director for Google. Those comments suggest that if completed, the project could drastically cut down on the costs for building offshore wind farms and could help to spur additional construction of new fields now that a more secure power transmission system is in the works. “If we take the burden of them building lines [to shore], we reduce their cost 17 percent to 20 percent for a project,” said Robert Mitchell, chief executive of Trans-Elect Development Co., the company building the power line.
If this trend continues it could end up being great news for the wind energy industry, as many hurdles to building and developing profitable wind farms could be removed. However, since the project is still in its early stages, it is hard to say which individual companies are likely to benefit from this infrastructure push and which will lag behind the overall industry. As such, broad wind energy ETFs that allocate assets to a number of companies which engaged in various aspects of the industry are an intriguing option. For investors subscribing to this thesis, we profile below the two best options available to investors who are seeking to buy into the quickly growing wind power industry [also read The Definitive Guide To Clean Energy ETFs].
First Trust ISE Global Wind Energy ETF (FAN)
FAN tracks the ISE Global Wind Energy Index, which tracks firms engaged in some aspect of the wind power industry. Companies that provide goods and services exclusively to the wind energy industry are given an aggregate weight of 66.67% of the index, while those companies determined to be significant participants in the wind energy industry despite not being exclusive to such industry are given an aggregate weight of 33.33% of the index. The fund is heavily weighted towards international securities, with utilities and industrial materials combining to make up nearly 90% of the fund’s total assets [see more on FAN's holdings page.]
PowerShares Global Wind Energy Portfolio (PWND)
Much like FAN, this ETF exclusively focuses in on the wind power industry with a significant allocation to international securities. The fund is entirely focused on two sectors, utilities and industrial materials, with a 55/45 breakdown between the two. In terms of country exposure, PWND offers a heavy allocation to Spain (26.5%), Hong Kong (15.3%), and Germany (11.9%), while allocating 10.2% to American firms. The fund is also more heavily concentrated than its First Trust competitor, holding just 36 securities compared to FAN’s 56 [for more on these funds, see Wind ETFs Head-To-Head].
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Disclosure: No positions at time of writing.