Five ETF Plays For Climate Change Legislation

by on October 21, 2009 | ETFs Mentioned:

Through the first six months of the Obama administration, campaign promises were largely moved to the back burner while all available resources were devoted to an economy spiraling further and further into recession. Now that the country has lifted itself out of the recession and a recovery, albeit a fragile one, is underway, Washington has resumed battling over proposed social overhauls. While health care reform has been the primary focus (and the source of the most heated conflicts), climate change initiatives have been making steady progress as well.

WWII-Era FactoryThat’s not to say that Congress is anywhere near a unanimous resolution on the matter. While most legislators are politically savvy enough to come out in favor of legislation protecting the environment, their ideas of the best way to do so vary wildly.

In June, the House passed HR 2454, better known as the Waxman-Markey bill, legislation including a “cap-and-trade” program whereby carbon emissions would be limited and corporations would need to purchase credits for any emissions exceeding predetermined levels.

In September, a bill championed by Senators John Kerry and Barbara Boxer was introduced with more aggressive targets for reducing 2020 emissions (see an excellent comparison of the two proposed pieces of legislation here). Kerry-Boxer also goes much further in promoting the development of nuclear power plants as a preferred clean energy option in the future.

ETF Plays On Climate Change Legislation

The end result from Washington still remains to be seen, with any number of scenarios currently in the running as viable options. And uncertainties over the impact on the economy and the environment will remain long after a resolution is approved and passed into law. But one thing is certain: the ultimate outcome from the climate change debate in Washington will have a major impact on the U.S. and global economies, touching a number of sectors. For investors with a hunch on how this saga may unfold, there are a number of ETF options that could see some big movements, both up and down, in coming months.

  • iShares S&P Global Nuclear Energy Index Fund (NUCL): The Boxer-Kerry Bill now making its way through Congress comes out in favor of nuclear energy, which produces far fewer harmful emissions than fuels such as coal. Nuclear power seems to be one of the only issue both parties can reach an agreement on. “We need to build 100 nuclear power plants in the next 20 years,” said Republican Senator John McCain earlier this month. “We have to, otherwise we’re not going to reduce greenhouse gas emissions.”


  • Market Vectors Coal ETF (KOL): As one of the least environmentally-friendly sources of energy, coal ETFs would figure to be under fire in the current environment. But despite the apparent bullseye on their back, coal ETFs have surged this year. KOL has gained more than 125% while the PowerShares Global Coal Portfolio (PKOL) is up more than 115% in 2009. This stellar performance may reflect skepticism over the ability of the government to gradually reduce dependence on coal as a major source of power in this country.


  • PowerShares Global Clean Energy Portfolio (PBD): This ETF invests in companies focusing on green and renewable sources of energy around the globe, including wind and solar power. Although PBD has only about a quarter of its holdings in U.S. companies, climate change discussions have also taken place at a global level (such as at the G-20 summit), and it is likely that many developed nations will follow the lead of the U.S. on further regulations.


  • iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO): In order to push through a climate change bill satisfactory to both parties, it is likely that the final legislation could include a provision for increased offshore exploration and drilling. If this is the case, firms engaged in exploration and production of energy sources in the U.S. could see a big boost.


  • Claymore/MAC Golbal Solar Energy ETF (TAN): While it has had its share of setbacks, many believe that solar power is one of the most promising alternative energy sources for the future. TAN invests in companies that produce solar power equipment and products around the world, including solar cell and module producers.


Disclosure: No positions at time of writing.