Earth Day Special: Definitive Guide To Clean Energy ETFs

by on April 22, 2010 | Updated June 15, 2012 | ETFs Mentioned:

Alternative energy remains a fast growing market segment not only in the world of ETFs, but in terms of total investment as well. Since 2005, investment in clean energy increased by 230% to $162 billion in 2009. Echoing similar trends occurring throughout the global economy, emerging markets have stepped up their push to become leaders in the development of alternative energy technologies. Last year alone, China invested $34.6 billion in clean energy, while the U.S. added $18.6 billion [see also The Ultimate Guide To Solar Power Investing].

In addition, the World Bank recently released a report saying that the six major East Asian economies will together need roughly $80 billion in investment per year in order to stabilize their greenhouse gas emissions by 2025. Despite these large numbers, clean energy only produces 6% of the world’s power suggesting that there is still plenty of room to run for this up-and-coming industry. While there are a multitude of clean energy ETFs currently on the market, they can really be broken down into four general types; wind, solar, broad clean energy, and nuclear.

Below, we profile the ETFs that fall into each of these categories, as well as the some of the miscellaneous clean energy funds:

Wind Power ETFs

Wind power has grown in popularity in recent years due to the ability to set up windmills in virtually any location around the world. The technology has become very popular in Central and Western Europe, where it accounts for double-digit energy output in some countries. On a global level, power generated from wind grew by more than 31% in 2009 alone, while China more than doubled its wind power output in the year. This suggests that the industry is booming despite the global recession (for more information on Wind ETFs, see Wind ETFs Head-To-Head).

First Trust ISE Global Wind Energy ETF (FAN): FAN offers investors global exposure to the wind industry, allocating 26.2% of its assets to Spanish equities, 16.3% to the U.S. and 14.9% to Germany.

PowerShares Global Wind Energy Portfolio (PWND): This ETF also offers investors global exposure, and is diversified across market capitalization levels with nearly equal allocations to large, mid, and small cap securities.

Solar Power ETFs

Representing perhaps the most well-known alternative energy, solar power ETFs offer investors the chance to invest in companies that are engaged in the production and development of solar power panels and related products. Solar power is seen by some analysts as the wave of the future due to the incredible amount of energy that is given off by the sun. However, intense competition among manufacturers–while good in the long-run for developing technologies to compete with oil and coal–have severely cut into profit margins for many of the main companies in the industry [see also The Ultimate Guide To Wind Power Investing].

Market Vectors Solar Energy ETF (KWT): This ETF focuses on mid cap securities, which make up more than half of the fund’s total assets. KWT’s top holdings are Renewable Energy Corp. and MEMC Electronic Materials, which combine to make up 22.6% of the fund’s total assets.

Claymore/MAC Global Solar Energy Index ETF (TAN): TAN offers investors a greater level of exposure to small cap securities by investing slightly more than two-thirds of its total assets in small cap firms. Its largest holding is First Solar, which makes up 10% of the fund’s total assets.

Broad Clean Energy Sector ETFs

These broad sector ETFs not only have allocations to wind and solar power, but also invest in other types of renewable power such as tidal or biomass. Additionally, these funds allocate significant amounts to companies that specialize in providing technology to the clean energy sector. As such, these funds could make for interesting choices for investors who seek exposure to the clean energy market but are not necessarily bullish on one source of power over another (also see Three Alternative Energy ETFs To “Go Green” For St. Patrick’s Day).

PowerShares WilderHill Clean Energy Portfolio (PBW): PBW tracks the WilderHill Clean Energy Index, a benchmark that tracks companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy. It holds 53 securities and is heavily exposed to companies in the electrical equipment sector.

Market Vectors Global Alternative Energy ETF (GEX): This ETF holds 30 securities and is heavily exposed to firms in the U.S., which make up 44% of the fund’s total assets. GEX is diversified among a variety of alternative power sources; its top holdings are Westas Wind Systems (9.5%) and solar giant First Solar (6.7%).

PowerShares Global Clean Energy Portfolio (PBD): PBD consists of 88 securities and has nearly one-third of its exposure to U.S. firms, the largest single country allocation. Additionally, the fund is heavy on mid and small cap securities; just 14% of the assets are classified as large cap firms.

PowerShares Cleantech Portfolio (PZD): PZD consists of 78 firms which focus on knowledge-based products or services that improve operation, performance, productivity, or efficiency, while reducing costs, inputs, energy consumption, waste, or pollution. PZD’s top holding is Schneider Electric (2.8%).

iShares S&P Global Clean Energy Index Fund (ICLN): This iShares fund allocates its holdings to a wide variety of alternative energy sources. Besides solar and wind, the fund also invests in firms that produce biomass and ethanol and geothermal producers. The top sector is electrical equipment, which makes up about 53% of assets. Independent power producers make up nearly 25% of holdings.

Nuclear Power ETFs

Despite the reluctance of the U.S. to boost nuclear power production, other countries, such as France, have jumped on the nuclear bandwagon; the European nation uses nuclear power for almost 80% of its electricity output. Some see nuclear power making a resurgent in the coming years since it is truly the only proven clean energy with a lengthy track record of performance that can compete with coal and oil power systems (see Nuclear ETFs: Ready To Surge?).

iShares S&P Global Nuclear Energy Index Fund (NUCL): NUCL holds 24 securities, maintaining heavy exposure to the electric utilities sector (50.9% of the total assets). Besides the U.S., which makes up 32% of the fund, NUCL offers global exposure by investing 14.6% in Japan, 13.2% in Canada, and 10.1% in France.

iShares S&P Global Nuclear Energy Index Fund (NLR): This fund is well diversified among market capitalization levels with roughly an equal amount in each of large, medium and small cap securities. While other funds in this segment focus on power generation, this fund allocates 36.6% to uranium mining and 4.5% to uranium storage, offering investors exposure to a seldom-tapped segment of the industry.

PowerShares Global Nuclear Portfolio (PKN): This ETF tracks the WNA Nuclear Energy Index, which follows globally-traded companies engaged in the nuclear energy industry. The benchmark represents reactors, utilities, construction, technology, equipment, service providers and fuels. It is heavily focused on large cap firms, which make up roughly two-thirds of the fund’s total assets.

Miscellaneous Clean Energy ETFs

These ETFs focus on a specific clean energy niche, and as such do not belong in any of the other categories. The majority of these funds focus on a specific fuel source (such as biomass), or seek to benefit from a greener lifestyle through more progressive transportation or carbon trading programs. These are some of the most targeted ETFs on the market today, and many have relatively low trading volumes. For ETFs likely to be impacted by any climate change legislation in the U.S., see Five ETF Plays For Climate Change Legislation.

PowerShares WilderHill Progressive Energy Portfolio (PUW): This ETF takes a unique approach to alternative energy investing by focusing on U.S.-listed companies that are engaged in transitional energy bridge technologies, with an emphasis on improving the use of fossil fuels. PUW offers exposure to sectors that many other clean energy ETFs do not touch, such as auto components (7.8%), chemicals (7.8%), and oil, gas and consumable fuels (17.9%).

PowerShares Global Progressive Transportation Portfolio (PTRP): PTRP focuses on companies that develop and produce cleaner and more efficient means of transportation. This ETF has a heavy focus on industrials (57.7%) with a large allocation to consumer discretionary firms as well (19.3%). Its top holdings include Clean Energy Fuels Corp., which provides natural gas for vehicle use, and Piaggio & C.S.p.A., which is an Italian company focusing on the production of scooters and motorcycles.

iPath Global Carbon ETN (GRN)- This ETN tracks the Barclays Capital Global Carbon Index Total Return which is designed to measure the performance of the most liquid carbon-related credit plans and is designed to be an industry benchmark for carbon investors. The index currently includes two carbon-related credit plans: European Union Emission Trading Scheme or EU ETS Phase II and Kyoto Protocol’s Clean Development Mechanism.

Elements CS Global Warming ETN (GWO): This fund tracks an equally weighted index that consists of 50 companies that have a focus on products that minimize global warming. The fund charges an expense ratio of 0.75% and is up 52% over the past 52 weeks.

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN): QCLN invests in firms that are engaged in the manufacturing, development and distribution of emerging clean-energy technologies such as solar, photovoltaics and advanced battery technologies. Its top holdings include Cree (8.4%), a leading maker of LED technology.

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Eric is long PBW