So far in 2010 one of the worst-performing sectors has been alternative energy, with some ETFs on pace to post double digit losses in the first quarter. This sharp downturn is due to a variety of factors that have combined to yield one of the worst stretches for the industry in recent memory. First, trouble in Europe has led to a strengthening of the dollar, which has helped to keep crude oil prices in check (until recently at least). With oil below $80 for most of the early part of the year, cries for development of alternative energy sources have been quieted. Furthermore, large budget deficits in many developed markets have forced some governments to drastically scale back solar and wind power subsidies to plug budget holes. Spain and Germany, two of the largest alternative energy producers in the world, have either cut or are planning to severely cut subsides for alternative fuels; in Germany subsidies are predicted to fall by as much as 15% this year.
However, some are forecasting that the worst may behind the up-and-coming industry. With renewed economic activity in China, many are predicting an increased energy demand for the country that cannot be met by traditional fuel sources alone. Closer to home, a weaker dollar looks likely in the near term as the Greek and European debt situation appears to be under control, at least for now. Moody’s has also warned the U.S. government that if it continues on this path it could force the rating firm to downgrade the U.S. from AAA status which would severely weaken confidence in the greenback. This news, as well as the continuation of the easy money policy from the Fed and recent OPEC decisions, has sent oil shooting up past $82/bbl.
Historically, periods of high oil prices have coincided with increased calls for development of clean energy alternatives (and spurred investment in the sector). If these issues are more than short-term problems, alternative energy could get a boost. For contrarian investors hoping for a second quarter rebound, consider these three beaten down alternative energy ETFs, all of which are down more than 10% this year.
Market Vectors Global Alternative Energy ETF (GEX)
GEX tracks the Ardour Global Index, which follows publicly traded companies that are principally engaged in the alternative energy industry around the world. The fund, which consists of 30 stocks, is heavily weighted to the United States, especially compared to its other alternative energy peers. The fund has 44% in U.S. equities, about 10% in Danish companies and 9% in Spanish stocks. By market capitalization, the fund is skewed towards mid and large cap securities, with 40% in large and 57% in medium. GEX has weightings in both wind and solar power with its largest holding (Vestas, 9.5%) focusing on wind, and its number two holding (First Solar, 6.7%) focusing on solar power. The fund is down 10% in 2010 but is up 33% over the past 52 weeks. GEX charges an expense ratio of 0.62%.
PowerShares Global Clean Energy Portfolio (PBD)
Another option available to investors is PBD, which follows the WilderHill New Energy Global Innovation Index. This benchmark tracks the performance of firms that specialize in greener and generally renewable sources of energy and technologies facilitating cleaner energy. Due to the fund’s focus on “innovation” it has a significant small-cap tilt, with over 30% of the assets going towards firms with less than one billion in market capitalization. The fund uses a modified equal weighting system, so it generally has a more even distribution among its holdings than some of the other funds in the alternative energy sector. In fact, the largest holding for PBD makes up just under 2.5% compared to over 9% for the largest components in GEX and ICLN. PBD is down 10.2% this year but it is up more than 50% over the past year. PBD charges an expense ratio of 0.75%.
iShares S&P Global Clean Energy Index Fund (ICLN)
Our last choice is one of the worst performing alternative energy ETFs in 2010; ICLN. This fund tracks the S&P Global Clean Energy Index, which follows global clean energy firms. The fund invests in 31 securities and has large allocations both developed and emerging markets. Although the U.S. makes up the largest country component of the portfolio at 25%, China is not far behind at about 21%. Unlike some of the other funds in the industry which focus on companies producing new technology, this fund devotes nearly half of its allocation to the industrial sector of electrical equipment and one-quarter to independent power producers. Due to this differentiation, ICLN can experience moderately different and often more volatile returns than some of its peers, as we have seen thus far this year. ICLN is down more than 15% this year and up just 22% over the past 52 weeks. However, the fund charges one of the lower expense ratios for the alternative energy sector; 0.48%.
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Disclosure: No positions at time of writing.