Through nearly eight months, 2010 has been an extremely rough year for energy ETFs, including both traditional oil and gas-focused funds as well as “greener” alternative energy products. Traditional energy ETFs have plummeted thanks in large part to the fallout from the Gulf oil spill, which has limited demand for many oil service firms and painted an uncertain regulatory picture. Meanwhile, alternative energy ETFs have seen generous subsidies cut by cash-strapped governments across the world as “austerity” became a new buzz word. Both sectors have also been battered by weak overall economic outlooks; the grim forecasts have helped to moderate oil prices, which in turn has taken some of the urgency out of the hunt for alternative fuel sources.
Some alternative energy ETFs are down as much as 30% on the year. Unfortunately for wind power-focused funds in particular, this downward trend looks likely to continue well into the fall quarter. Earlier today in Europe, Vestas Wind Systems, the world’s largest manufacturer of wind-turbines, plummeted by close to 20% in its home market in Copenhagen as investors digested a weak outlook for the rest of 2010. Vestas reported a $20.5 million loss for the most recent quarter, as revenues declines 17% from a year earlier due to increased competition. The firm also reported declining margins on a variety of products, despite the significantly weaker euro. Vestas said it now only expects to post an EBIT margin of 5% to 6% and revenue of €6 billion for the full year, against the previous forecast of a 10% to 11% EBIT margin and revenue of €7 billion.
“Right now it’s just a shock, and Vestas has suffered a serious blow to its credibility,” Teea Reijonen, a London-based analyst with Royal Bank of Scotland Group Plc, said today in a telephone interview posted on Bloomberg. “Analysts are going to take a very dim view of margins for 2011 given what’s happened this year.”
Below, we profile three funds which saw the biggest negative impact from this bearish outlook from Vestas:
PowerShares Global Wind Energy Portfolio (PWND)
PWND tracks the NASDAQ OMX Clean Edge Global Wind Energy Index, a benchmark designed to measure the performance of global companies engaged in the wind energy industry–primarily manufacturers, developers, distributors, installers and users of energy derived from wind sources. The fund allocates almost 10% of its assets to Vestas, which was the third biggest holding in PWND behind fellow European firms EDP Renovaveis SA (11.4%) and Iberdrola Energias Renovables SA (11.2%). The fund was down 3.5% in early Wednesday trading and has lost nearly 32% so far in 2010 [also read Chinese Demand Could Boost These Three Clean Energy ETFs].
First Trust ISE Global Wind Energy ETF (FAN)
Although a small fund at just $56 million in assets under management, FAN represents one of the more liquid options available to investors seeking a targeted play on the wind industry, with an average daily volume of about 43,000 shares. FAN offers investors a heavy focus on the European wind energy market, with Spain taking the top individual country spot at 27.5% followed by Germany at 16.2% and the U.S. at 15.2%. For individual holdings, FAN matches PWND for its top three, but is slightly less concentrated–it makes an allocation of just 6.8% to wind power giant Vestas. FAN was down close to 4% in mid-morning trading and has slumped close to 31% since the beginning of the year [also read Wind ETFs Head-To-Head: PWND vs. FAN].
Market Vectors Global Alternative Energy ETF (GEX)
Although not focused in on the wind power industry, GEX offers the highest individual allocation to Vestas at 11.8%. The fund also offers exposure to 29 other companies in the Ardour Global Index, including First Solar (8.0%) and Cree (7.7%). GEX allows investors to achieve reasonably balanced exposure in terms of market capitalization levels and geographic regions; 46.3% of the fund is in mid caps while about 40% goes to American companies. The fund was down 2.8% in early Wednesday trading and is now down about 21% so far in 2010 [also read the Definitive Guide To Clean Energy ETFs].
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Disclosure: No positions at time of writing.