Why GOOG Could Crush The Coal ETF

by on May 17, 2010 | ETFs Mentioned:

When Google announced earlier this month that it was making a nearly $40 million investment in two wind farms owned by NextEra Energy Resources, many investors were left scratching their heads. The Mountain View, California-based company is known for allowing its employees to pursue pet projects on company time, but a not-so-insignificant investment in wind turbines located in North Dakota seems like a stretch for the world’s largest search engine. Upon closer review, however, the wind power investment is right up Google’s alley, and its latest business venture could have some wide-ranging effects.

The infrastructure behind the internet that has become a vital part of both personal professional lives around the globe is a great mystery to most users. Because the World Wide Web is so intangible in nature, few have given much consideration to the energy needed to power such a ubiquitous part of American life. “The digital photos, shared videos, tweets and Facebook chatter that make up our online lives may appear to have no physical form, but they contribute to some very real environmental damage,” writes Stephen Foley.

The digital data that seems to be floating through cyberspace is actually stored in a massive network of computers that are owned by Google, Yahoo!, and others. These computers are stored throughout the world in “data warehouses” that consume incredible quantities of energy to stay running 24/7.

So what’s powering the bulk of this high-tech network that puts streaming videos, music, and seemingly-limitless information at the fingertips of billions of people around the globe? Solar power? Hydro power? Clean nuclear technology? Not exactly. According to a recent report, many of these computer farms are located in areas of the U.S. where where electricity is generated primarily at coal-fired power plants.

Expanding Carbon Footprint

This need for coal-based power has put the companies that own these data warehouses in the crosshairs of environmental groups seeking to promote clean-burning alternatives. “The last thing we need is for more cloud infrastructure to be built in places where it increases demand for dirty coal-fired power,” reads a recent report released by Greenpeace.

The Internet’s power appetite is already impressive, and only expected to grow. “The data centre industry now is on par with the airline industry as far as the carbon footprint,” says Jeff Monroe, head of Verne Global – a data centre company working in Iceland. And as the amount of information stored in this cloud grows–it’s estimated that 24 hours of video footage are uploaded to YouTube every minute–so too does the number of computers needed to store and disseminate it. This translates into greater demand for coal and coal energy, an often-overlooked side effect of the Web’s tremendous growth.

Coal & Wind ETFs In Focus

So in this context, Google’s recent expansion into the wind power industry begins to make a lot of sense. As one of the world’s largest corporate consumers of electricity, Google could dramatically reduce its reliance on coal-fired technology if wind power emerges as a cost-efficient and widely-available alternative. Google enjoys a strong reputation as a good corporate citizen, drawing praise for everything from its resistance to Beijing’s pushed for censorship to its eco-friendly headquarters. With the company’s use of coal power beginning to draw scrutiny, the investment in alternative energy sources is a logical one to preserve its image (and perhaps even cut costs down the road).

Below, we highlight two ETFs that could feel the impact of this development over the long term (for more ETF ideas, sign up for our free ETF newsletter):

  • Market Vectors Coal ETF (KOL): Google’s efforts to move away from coal and towards wind power certainly won’t spell the end of the global coal industry–at least not overnight. Nevertheless, it threatens to hamper growth in one of the few growth areas for coal power. This ETF tracks the Stowe Coal Index, investing in companies worldwide that generate at least 50% of their revenues from coal (see Top Ten Performing ETFs Since The Market Bottom).

  • First Trust ISE Global Wind Energy ETF (FAN): This ETF stands in contrast to KOL; it tracks the ISE Global Wind Index, a benchmark that includes companies providing goods and services to the wind industry. FAN has slumped in recent months as incentives for alternative energy companies have dried up amidst steep budget cuts, but many investors remain bullish on this sector (see this Guide To Clean Energy ETFs).

Disclosure: No positions at time of writing.