After soaring from all time lows in March 2009 through the end of the year, many alternative-energy ETFs have fallen sharply in 2010, as crumbling government finances have forced certain countries to scale back or eliminate altogether subsidies to this still-nascent industry. Many alternative energy sectors have tumbled by 10% or more in the first quarter of 2010, catching the attention of value investors keeping an eye out for attractive entry points. One particularly interesting corner of the alternative energy market is the wind sector, which some believe has an extremely bright future.
Europe and Asia continue to lead the way in the development of sustainable wind technology. The European Wind Energy Association (EWEA) recently stated that it expects the completion of 10 European offshore wind farms in 2010, which is a market growth increase of 75% compared with 2009 . Ofgem, the regulator of electricity and gas markets in Britain, confirmed that wind subsides have surpassed £1 billion a year for the first time. In Asia, wind capacity is expected to surge, reaching 25.5 GW by 2013.
The wind energy sector is also taking off in the U.S. The American Wind Energy Association recently announced that over 10,000 megawatts of new wind power generating capacity were installed in 2009, as much electricity as three large nuclear power plants. Still, finding a way to achieve renewable energy that is both ecologically friendly and profitable is still a major challenge.
Wind ETF Options
For ETF investors looking to gain exposure to this risky but potentially rewarding sector, there are two main options: the PowerShares Global Wind Energy ETF (PWND) and First Trust ISE Global Wind Energy ETF (FAN). While these ETFs are similar, they’re far from identical. Below, we present a side-by-side comparison of these funds in several key areas.
PWND tracks the NASDAQ OMX Clean Edge Global Wind Energy Index, a benchmark that measures the performance of global companies engaged in the wind energy industry. This index includes manufacturers, developers, distributors, installers and users of energy derived from wind sources. FAN follows the ISE Global Wind Energy Index. This benchmark gives an aggregate weight of 66.67% to companies that are identified as providing goods and services exclusively to the wind energy industry. 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.
FAN offers more diversified exposure, holding 56 different equities while PWND only holds 36 equities. The top three holdings for both funds are identical – EDP Renovaveis SA (EDPR.PL), Iberdrola Renovables (IBR.SM), Vestas Wind System (VWS.DC).
Both ETFs maintain diverse global portfolios, although the allocations that differentiate the two funds are important for investors to take into consideration. FAN has approximately twice as much exposure to the U.S. (16.29%) than PWND (8.29%). FAN does not incorporate any exposure to China and only attributes a meager 3.4% to France, while PWND allocates almost one-fifth of their portfolio to France and 4.61% to China. FAN has a greater geographic concentration, holding 60% of the portfolio among Spain, the U.S., Germany. About 45% of PWND is allocated to the three largest countries (France, Spain, and Germany).
Performance And Expenses
Since the beginning of the year, both PWND and FAN have significantly underperformed the market, returning about -14 % and -10%, respectively. However, over the past 52 weeks, both funds have performed very well; both are up more than 20%. From a liquidity perspective, FAN is more heavily traded; its average daily volume is more than 55,000 shares, compared to about 15,000 for PWND.
From an expense perspective, FAN is more attractive, charging a ratio of 0.60% compared to PWND’s 0.75%.
While both funds offer diverse international exposure to the wind energy, there are a few key differences that will determine the suitability for a particular investor. For investors bullish on the future of wind power in the U.S. and U.K., FAN may be the best bet. For those looking for more global exposure (including France and China), PWND may be the better choice.
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Disclosure: No positions at time of writing.