Alternative Energy ETFs - A Good Way To Invest in a Booming Sector
Alternative energy is undoubtedly the future and we are just entering the early phases of what will be the next booming industry.
Even if the growing consensus over global warming isn’t enough to change human behavior, we really don’t have much choice in the matter. Fossil fuels are becoming more difficult and expensive to find and extract from the earth. Couple lower supply levels with rapidly increasing demand from nations such as China and India and you have the perfect recipe for much higher oil prices. Many experts believe we have reached or will soon reach “Peak Oil.”
Peak oil is the date when the peak of the world’s conventional petroleum (crude oil) production rate is reached. After this date the rate of production is predicted to enter terminal decline, following the bell-shaped curve predicted by the theory. Some observers such as Kenneth S. Deffeyes, Matthew Simmons, and James Howard Kunstler believe that because of the high dependence of most modern industrial transport, agricultural and industrial systems on inexpensive oil, the post-peak production decline and possible resulting severe price increases will have negative implications for the future outlook of the global economy.
With oil prices over $60 per barrel, alternative energy is suddenly receiving an unprecedented amount of attention and funding. The rate of technological advancement is increasing and clean energy systems that were once price prohibitive are becoming more and more feasible.
Investing in the Future
The number of publicly listed companies involved in the clean energy sector has skyrocket in recent years as private equity firms and individual investors are attempting to position themselves in what will be the next big thing. But similar to the dotcom days, there is plenty of hype mixed in with the companies offering substance. With the technology difficult to understand or envision, the average investor should be cautious when picking individual alternative energy stocks. We have made a few recommendations in previous articles, but these stocks are very volatile and only suitable for investors that are very risk tolerant. A safer, more diversified vehicle for investing in alternative energy exists, so let’s take a closer look inside our favorite Clean Energy ETF.
Green ETFs have been performing very strongly lately, driven mainly by the solar sector. Market Vectors Global Alternative Energy (NYSE:GEX) started trading in May of this year at $40 and hit a high today of $48. That is a 20% return in just over two months.
But our favorite alternative energy play, the PowerShares WilderHill Clean Energy ETF (AMEX:PBW) recently shot up to nearly $23, after starting the year at $17. That is a gain of nearly 35% in just six months. Take a look at the chart below, which may encounter some resistance at the previous high, forming a bullish cup and handle pattern.
The PowerShares WilderHill Clean Energy Portfolio (Fund) seeks to replicate, before fees and expenses, the WilderHill Clean Energy Index, which is designed to deliver capital appreciation through the selection of companies that focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.
Over 50% of the allocation is small-cap growth, with the top 10 holdings heavily weighted heavily toward the solar sector and consisting of:
Yingli Green Energy Holding Co. Ltd. (ADS) 3.83%
Trina Solar Ltd. (ADS) 3.68%
JA Solar Holdings Co. Ltd. (ADS) 3.61%
Echelon Corp. 3.57%
First Solar Inc. 3.46%
Suntech Power Holdings Co. Ltd. (ADS) 3.43%
Zoltek Cos. 3.33%
American Superconductor Corp. 3.27%
Evergreen Solar Inc. 3.15%
Ormat Technologies Inc. 3.10%
Much of PBW’s recent action came from surges in First Solar (FSLR), JA Solar Holdings (JASO), Trina Solar (TSL) and Yingli Green Energy (YGE ), which all spiked 15% or more on news of inking deals worth over $1 billion dollars, doubling earning or beating analysts’ profit expectations by significant margins. The solar sector is hot (pun intended) and we expect PBW to continue its climb and make a record high above $24 in the coming weeks. After breaking this resistance, we think the ETF could reach towards $30 by the close of 2007.
UPDATE: Click for an article on Wind and Solar Exchange Traded Funds.
Disclosure: The author owns PBW
Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.