Charles Morand

Natural gas is the one commodity that has mostly resisted the rally ushered in some three months ago by a growing consensus that the worse may be over for the economy.

A number of reasons have been put forward to explain this, including record storage levels and a growing supply base being unlocked through shale gas production in North America.  

Yet natural gas' future looks bright: (a) it burns a lot cleaner than coal, making it a superior alternative to meet base- and peakload power requirements in a carbon-constrained world; (b) it is receiving growing attention as bridge fuel between gasoline-powered internal combustion engines and electric vehicles; (c) there is ample supply of it in the U.S. and Canada, making it popular with the energy independence crowd.

The near-term picture, however, is bleak...and it could be about to get bleaker. According to analysts at Citigroup Global Markets, trading activity at the US Natural Gas Fund (UNG) may be 'artificially' propping the front-month NYMEX contract. The storage situation is apparently bleak enough to warrant yet lower prices, begging the question: when, if it all, will the chickens come home to roost?

Although the combination of a bright future and depressed prices make natural gas - through UNG - an interesting investment idea for light-green alt energy investors with a time horizon beyond 12 months, there could be further price declines on the way. Right now may yet be a little early to pull the long trigger...

DISCLOSURE: None                

Posted by Charles Morand at 11:00 AM | Permalink | Comments (0)

Charles Morand

A few months ago, I conducted analyses of the wind and solar power ETFs. I've recently turned my attention to the general alternative energy ETFs, or those that span several sectors.

The general alt energy ETFs fall into two categories: 1) US Only and 2) Global. The US Only ETFs are the First Trust NASDAQ Clean Edge US Liquid (QCLN) and the PowerShares Clean Energy (PBW). The Global ETFs are the iShares S&P Global Clean Energy Index ETF (ICLN), the PowerShares Global Clean Energy Portfolio (PBD) and the Van Eck Global Alternative Energy Fund (GEX).

The chart below shows 1-year's worth of weekly returns for the five ETFs. You can click on the chart for an expanded view if you are having difficulty reading it.



The table below provides a few key statistics on the ETFs.

Ticker	May 22 Price ($)	Expense Ratio (%)	1-yr Return (%)	St Dev of Returns (%)	6-mth Return (%)	Holdings (# of stocks)
PBD	14.55	0.70	(49.3)	4.2	25.6	77
QCLN	12.75	0.60	(52.5)	4.3	19.7	78
GEX	25.00	0.65	(53.9)	5.1	18.7	28
ICLN	22.96	0.48	(56.5)	5.2	17.9	37
PBW	9.19	0.70	(58.6)	4.4	8.8	80

As the data in the table demonstrates, there is more to picking the right alt energy ETF than simply looking at the expense ratio. PBD, at a hefty 0.7%, has outperformed its peer group with lower volatility over the past year.

For example, $1,000 invested invested into PBD six months ago would have been worth $1,256 pre-expense on May 22, 2009, and $1,249 post-expense. The same $1,000 invested in ICLN, the 'cheapest' of the group, would have been worth, respectively, $1,179 and $1,174 on May 22. Moreover, PBD would have acheived this performance with a lower standard deviation - i.e. volatility - than ICLN.

While one would need to test for statistical significance before making any hard conclusions about outperformance, these results certainly suggest that, when it comes to picking an alt energy ETF, one must dig deeper than simply the expense ratio, as strong outperformance in the long run can more than make up for a few basis points in extra cost.   

Alt Energy & Cleantech Sector Allocation

The table below lists out the percentages of total fund assets invested into the AltEnergyStocks.com alternative energy Categories. I had to make a few judgment calls on how to categorize certain firms, with the most frequent overlap being between Energy Efficiency and Electric Grid.

It must also be said that a few of the stocks held by the ETFs, especially those that I categorized as belonging to the Energy Efficiency Category, would not qualify as either alternative energy or energy efficiency for more purist alt e investors. QCLN, in particular, holds a number of power management stocks that do not appear to be primarily, if at all, targeting environmental opportunities.    

% Of Fund Value Invested In Each Category
Category	PBD	QCLN	GEX	ICLN	PBW
Solar	35.3	36.8	34.9	51.2	36.1
Wind	20.0	6.4	24.8	17.9	5.7
Power Production	17.2	0	17.2	23.9	5.3
Energy Efficiency	9.1	40.2	11.6	0	13.9
Ethanol	4.0	0	1.0	0	3.5
Battery	3.2	5.4	0	0	10.4
Geothermal	2.5	4.8	1.1	2.1	9.0
Waste-to-Energy	1.4	0	3.8	4.0	0
Fuel Cell	1.2	1.1	0	0.5	1.5
Electric Grid	1.2	1.2	0	0	2.7
Biodiesel	0.7	0	0	0	0.6
Clean Transportation	0.7	0	0.3	0	4.5
Biomass	0.5	0	0	0	0
Microturbine	0.4	0	0	0	0
Environmental Markets	0.3	0	0	0	0
Electricity Storage	0.3	3.7	0	0	1.2
Hydro	0	0	0.7	0	0
Ocean Power	0	0	0	0	0.4
Hydrogen	0	0	0	0	2.0
Other	2.0	0.4	4.6	0	3.2

This table helps shed some light on the reasons behind the higher expense ratios for some ETFs. PBW and PBD, for example, hold 80 and 77 stocks, respectively, and span 15 and 18 categories. ICLN, by contrast, holds 37 stocks and spans only six categories. This wider coverage accounts, in part, for higher costs, although it also results in lower volatility.       
 
QCLN stands out with the 3rd lowest expense ratio, a 78-stock portfolio, the second lowest standard deviation and the second highest returns over the past year. It spans nine Categories and has by far the heaviest weighting in Energy Efficiency (this may be good depending on your view of the sector).

PBW also stands out as the definite dog, which may appear counter-intuitive seeing as it tracks an index by the same provider as PBD. The answer partly lies in the ETF's US focus.   

PBD's top ten holdings, accounting for ~32% of total fund value, span three categories: Wind, Solar and Power Production. There is only one US-listed company, Suntech Power (STP), with the balance accounted for by some leading European wind firms like Vestas (VWSYF.PK) or renewable power developers like Iberdrola Renovables (IRVSF.PK).

Most of alt energy's best and most profitable companies are not based in the United States, conferring the Global ETFs an advantage in constructing their portfolios. This advantage stands out when comparing the quality of top holdings in PBD vs. PBW. 

Despite this, QCLN managed to perform well because of its heavy concentration in Energy Efficiency and Solar. Together, stocks in these two Categories account for 77% of fund value. By contrast, Solar and Efficiency account for only 50% of PBW's value. Both sectors have experienced strong upside over the past few weeks on the back of the Obama plan and the Chinese stimulus package.

Thus, while QCLN holds a relatively large basket of stocks, it is fairly heavily concentrated Category-wise, which has allowed it to outperform along with its main Categories. PBW follows a very similar diversification approach to PDB but the risk spreading in the latter, because of the comparative lack of high-quality alt energy firms in the US, has led to mediocre performance. There is most likely also something to be said for the US stock picking abilities of PBW's makers (or the lack thereof). The result has been a lousy stock mix that has largely missed out on the latest rally.

ICLN and GEX follow broadly similar approaches and asset allocation strategies between Categories, though investors in GEX should in principle benefit through lower volatility from a somewhat more diversified portfolio. In practice, their results are effectively the same both in terms of returns and standard deviation.

Deciding Where To Invest

Which clean energy ETF to invest in depends on what an investor wants to achieve.

1. Play The Obama Administration

The Categories most likely to outperform from recent Obama alt energy policies are: Energy Efficiency, Battery, Electric Grid, Wind and Geothermal. QCLN has a 58% weighting in these five categories vs. 42% for PBW. Besides this, QCLN has outperformed PBW over the past year at a lower cost and similar volatility. The choice here is clear.

2. Play The Conventional Global Sectors Aggressively

The conventional and most mature alt energy Categories are Wind, Solar and Power Production. PBD, ICLN and GEX have weightings in these three Categories of, respectively, 70%, 93% and 77%.
 
Because of its high concentration in target Categories and low cost, my pick here is ICLN if an investor wants to play a strong return to growth in wind and solar. The Power Production Category is made up of developers, IPPs and utilities with strong exposures to renewables. Those entities have been at the fore of wind's growth for the past five years and will play a large role in solar going forward as ground-mounted installations expand their market share.  

2. Play Global Alternative Energy 'Conservatively'   
 
For the investor who wants broad exposure to alternative energy with relatively low risk, my recommendation is PBD. Despite its high cost, it offers good diversification in terms of both individual stocks and Categories. Moreover, its strong performance over the past six months says something about the quality of the underlying index and, indirectly, about the index makers' global stock picking capabilities.

Disclosure: None

Posted by Charles Morand at 06:01 PM | Permalink | Comments (5)

Two months ago, Tom told us how he'd dipped a toe into the black stuff (i.e. bought the OIL etf) on grounds that current supply destruction related to the depressed price of crude oil would eventually lead to the same kind of supply-demand crunch that led oil to spike during the 2004 to mid-2008 period.

If you need evidence that the current price of crude is wreaking havoc in the world of oil & gas exploration, look no further than Alberta and its oil sands. The oil sands contain the second largest oil reserves in the world after Saudi Arabia, but more importantly will account for the lion's share of incremental supply as conventional oil production continues to decline. The province's economy, which had been growing at a breakneck pace for the past five years, has come to a grinding halt: employment insurance claims grew by twice the Canadian average over the past year; personal bankruptcies jumped by 61%; and home foreclosures are on the rise. This is the result of significant project cancellations that will no-doubt limit Alberta's ability to ramp-up output once prices climb back again.

It is thus no surprise that Cambridge Energy Research Associates and others are warning about the economic hazards of curtailing investments into conventional and alternative energy.  

Alt Energy & Fossil Energy

Oil being the most followed of the energy commodities, it is no surprise that it is receiving most of the media attention. Arguably, natural gas and coal prices should matter more to alt energy investors than oil prices: according to REN21, of the $71 billion invested in renewable energy in 2007, 47% went into wind and 30% into solar PV. Both technologies are used for power generation (investments into transportation alternatives are comparatively small) and, in the US, coal and natural gas are the dominant fuels in power production. The relentless focus of the popular press and other pundits on the the economic case for alternative energy being closely tied to the price of crude oil is thus mostly misplaced.

Case in point, last November, a reader wrote me with a correlation analysis conducted over a 5-year period (or, where there wasn't five years' worth of data, since inception). The correlation coefficients between the returns on crude oil and those on alt energy securities were as follows: GEX, 0.19; PBW, 0.14; TAN, 0.18; and the index underlying FAN, 0.19. These are, by most measures, pretty low correlation coefficients. Given the reader's reputation, I trusted the numbers. 

Nevertheless, in alt energy investing as in life, perception is often reality. Given the many signs pointing toward a rapid escalation in crude prices - demand can and will rebound far quicker than supply - I decided to re-explore the relationship between fossil and alt energies. If a strong positive correlation can be found between alt energy investments and crude oil, natural gas and coal investments, there may not be a need to dip a toe into the black (or colorless) stuff at all - one can focus on alt energy alone and still enjoy the ride up.

In order to verify this, I ran a basic correlation analysis with the daily returns on the KOL (coal), OIL (crude) and UNG (nat gas) ETFs/ETN on the one end, and the daily returns on the alt energy ETFs on the other. I got the return data from Yahoo Finance using the Adjusted Close prices that include dividends and splits. Given the results above from our reader's analysis, I only went back six months to see if the (lack of a) relationship still held.   

OIL and UNG track the prices of futures contracts in the underlying commodities, so they are pretty decent securities to use to estimate the returns on crude and nat gas investments. KOL, on the other hand, tracks a basket of coal company stocks. It's the closest thing I could find but it's not ideal as stock returns don't necessarily track commodity returns. For instance, large mining firms will often sell a high proportion of their output through fixed-price contracts, preventing them from benefiting from sudden surges in spot prices. 

The boxes delineate general alt energy ETFs (ICLN to GEX), the solar ETFs (TAN, KWT) and the wind ETFs (FAN, PWND). There aren't any notable differences between the ETF categories, with the most significant differences being between the fossil fuel ETFs/ETN and the alt energy ETFs.   

The relationship between alt energy stocks and coal stocks appears relatively strong. However, in the absence of return data on coal, it's hard to tell whether investing in alt energy stocks (or coal stocks for that matter) is an optimal way of playing increasing coal prices. Given the structure of the coal market, with significantly less involvement by purely financial actors than in oil or natural gas markets, this is a hard one to play for retail investors, although data appears to suggest there is a play.

Though the correlation appears to have strengthened somewhat between crude oil and alt energy investments in the last six months, it remains weak enough that if someone wants to play a return to expensive oil they are still better off dipping a toe (or even an entire foot!) in the black stuff. The same holds for nat gas.

This quick and dirty analysis wouldn't withstand close methodological scrutiny. My only intent here was to see whether these relationships were worth exploring further - they are not. If you want to benefit from crude oil and nat gas price increases and have no ethical qualms about it, invest in them directly!

DISCLOSURE: Charles Morand has a long position in TAN.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Charles Morand at 09:35 PM | Permalink | Comments (3)

The credit crisis and ensuing collapse in equity markets hasn't been especially good for the mutual fund industry (especially of the equity type). Over the weekend, I ran a search on Morningstar's Fund Quickrank using "U.S. Stocks Funds" as a category and "Total return %: 1 Year" as a ranking field. The top-five ranked funds (as at March 20, 2009) and their performances are outlined in the table below, excluding fees. The group average, containing 9,978 funds, is -40.43%.  

Fund Name	Ticker	1-Yr Total Return (%)
Gabelli ABC	GABCX	-1.52
Reynolds Blue Chip Growth	BRIG	-2.01
Apex Mid Cap Growth	BMCGX	-2.46
Franklin Biotechnology Discovery A	FBDIX	-3.49
Eaton Vance Worldwide Health Sci A	ETHSX	-4.12

Though the losses on these best-in-class funds pale in comparison to the 42% drop in the S&P 500 or the group average, the fact of the matter remains that most equity mutual fund investors didn't make any money over the past year. Run the screen for three years, and the search yields only three positive names (probably only 2 after fees) with a group average of -15.69%. The five year screen looks decidedly better with several funds in positive territory, although the group average still stands at -5.19%.

For the do-it-yourself investor, some of the these numbers might not look so bad in light of how overall markets have performed. However, for the risk-averse investor who was sold steady (and relatively secure) returns over the long-run, this is less than thrilling. It's no wonder, then, that mutual funds have been experiencing net outflows of late.

Unsurprisingly, alt energy/cleantech mutual funds have performed no better (or even worse!) than the industry as a whole, with one fund even folding this past year. This may have been enough to convince some investors that alt energy wasn't for them.

A Diamond In The Rough? 

Last week, I came across a Canadian alternative energy mutual fund that has had a stellar year throughout the morass: the Creststreet Alternative Energy Fund (CAM400). The fund is up 94% over the year ending Feb. 28, 2009, and closed up 194% in 2008.

The portfolio manager recognizes that these returns were generated when the fund was only about 12% of its current size (C$3M Vs. C$25M now) and are probably not sustainable. They were related mostly to trading rather than investing. The fund was short the Claymore/MAC Global Solar Energy Index ETF (TAN), the PowerShares WilderHill Clean Energy ETF (PBW) and PowerShares Global Clean Energy Portfolio ETF in the latter half of 2008 (PBD), which no-doubt explains some of the results.

According to the manager, the fund "will invest in anything that exploits an opportunity outside traditional, carbon-based-emitting sources of energy." That said, the fund did invest in oil&gas and even gold bullion. The fund manager claims to be targeting about 25% annually. With about 65% of fund value in cash, stock picks are being made right now so the next 12 months should tell whether the manager is as strong a stock picker as he is a trader!  

This fund isn't available to US investors. Nevertheless, given the manager's returns over the past 12 months, I figured some of the info (and especially the stock picks) he provided in the interview I read would be of interest. The stocks are in the table below.

Name	Ticker	TTM PE	TTM EPS (US$)	What Creststreet Says About It
RuggedCom	RUGGF.PK	26.6	0.95	"The maker and seller of industrial-grade routers for utility substations has strong management, can benefit from North American fiscal stimulus plans and is a potential takeover candidate"
World Energy Solutions	WLDE.PK	N/A	-0.10	"The firm, which hosts online auctions for the trading of electricity contracts and carbon credits, can potentially benefit from the implementation of U.S. carbon cap-and-trade legislation in the United States"
Ormat Technologies	ORA	23.6	1.13	"The undisputed market share leader in geothermal power production and equipment sales should benefit from U.S. fiscal stimulus loan guarantees for renewable power production"
Comverge	COMV	N/A	-4.43	"The firm sells gear to help consumers cut power use to relieve stress on electricity grids, and sells the power back to a utility. It's not yet profitable, but has a solid cash position and are poised to experience strong sales growth resulting from subsidies targeted to utilities to improve energy efficiency"

Besides the picks, the portfolio manager likes the smart grid and a potential cap-and-trade system as investment plays on the Obama Administration's policies.

DISCLOSURE: Charles Morand does not have a position in any of the stocks or funds discussed above or a commercial arrangement with Creststreet.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimerhere.

Posted by Charles Morand at 08:52 PM | Permalink | Comments (2)

When I was researching my Comparison of Clean Energy Mutual Funds and Clean Energy Tracking Portfolio articles, I came across something strange: the American Trust Energy Alternatives Fund (ATEAX) did not seem to have a listing on American Trust's website.  However, finance sites were still publishing price and holdings data, and there was no recent news, so I didn't think much of it, since other funds seemed superior based on both costs and fund holdings.

Last week, I noticed that the fund's price had not changed since the end of February, so I did a little digging.  Here is what I found:

• The fund's website, from this August 2008 article, is down.
• The fund manager, Carey Callaghan, has not done any interviews in that capacity since 2008, although he seemed to be doing one or two a month before then.
• A cached page on Google from Fidelity (which distributed the fund) stated that it was "closed to all investors."  The original page no longer exists.

It's not particularly surprising that the fund closed.  It was launched in July 2008, shortly before the financial crisis began.  A mutual fund needs to acquire significant assets in order to pay for its costs out of management fees, and even distribution by Fidelity was not enough to help a new fund acquire assets in the last half of 2008.

Since the fund only had a few million dollars under management, it's not particularly surprising that its disappearance made no ripple.

Updates

The exponential growth in the number of available clean energy funds I talked about in the intro to my Costs of Green Funds article has broken down:

Also, since ATEAX is defunct, I will be comparing my Clean Energy Tracking Portfolio to only the remaining five funds.  As of the close on March 13th, the five stock portfolio is up 5.6% (including commissions), compared to the remaining 5 funds, which have fallen 0.9% (after front-end load), with a range of -1.2% to +1.7%.  Although it is still early days, my tracking portfolio is clearly tracking the funds very poorly.  When it comes to tracking portfolios, a significant out performance is just as bad as a significant underperformance, because it brings into question the procedure used to form the tracking portfolio.  

If I were to revise my procedure to come up with a better tracking portfolio I would:

1. Look at the top 10 holdings of the remaining funds, not just the top 5.
2. Try to match the allocation to various clean energy sectors that the funds were using.  

Efficiency and Smart Grid Outperform

Because I decided to use one equally-weighted stock in each sector, I was relatively underexposed to solar and wind compared to the funds, and over-exposed to Efficiency and Electric Grid stocks.  The difference in sector allocation probably accounts for much of my tracking portfolio's out performance over the last couple weeks.  As I discussed in my article about the American Recovery and Reinvestment Act, as well as in my repeated emphasis on the sectors over the last two years, these sectors have always been likely to outperform.   

If I expected Energy Efficiency and Grid stocks to outperform, why do the clean energy funds have such a heavy emphasis on Solar and Wind Stocks?  It's probably not because I'm smarter than they are.  More likely, it's because, if you don't want your mutual fund to fold like the unfortunate American Trust, you need to sell your fund to investors.  And investors get excited about wind and solar... they get much less excited about energy efficiency. 

When I last asked readers what stocks I should research, I got one request for a combination electric grid and wind stock (which I had covered previously,) no requests for efficiency stocks, four requests for Solar, and two requests for pure wind stocks.  With demand like that, I could probably increase my readership if I spent more time talking about solar, and the mutual funds are simply doing what's in their best interest: they buy solar and wind so that their investors will buy the funds.

Mutual funds are giving investors what they want.  If that means buying trendy sectors, then trendy sectors are what the funds buy.

Tom Konrad, Ph.D.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 03:04 PM | Permalink | Comments (4) | TrackBacks (0)

The intense and growing investor interest in Clean Energy Investing can be seen in the recent growth of new clean energy mutual fund and Exchange traded fund issues.  Although competition for investors' money is heating up, and I've noticed a slow decline in fund fees, those fees are still quite high, with expense ratios ranging from 1% to 2.75% for Clean Energy mutual funds and 0.5% to 0.85% for Clean Energy ETFs.

For many investors, that leaves a lot of room for cost savings by investing in individual stocks.  Nearly all the benefits of diversification can be achieved with a 20-50 stock portfolio, if those stocks are chosen to minimize internal correlations.  An investor who decides to place 20% of his portfolio in Clean Energy should only need 4-10 stocks in the sector to achieve most of the benefits of diversification.  

For example, an investor with $20,000 in a diversified IRA might decide that this year's $5000 contribution should go into Clean Energy.  He could buy $1000 worth of five Clean Energy stocks to achieve a 20% allocation to clean energy without significantly reducing his overall diversification, and resolve to purchase another $1000 worth of a single clean energy stock each subsequent year, to maintain that approximate diversification.  The table and graph below show how his costs would compare to investing the same amount in sector mutual funds or ETFs, assuming a moderate $13 brokerage commission.  These calculations assume no price appreciation.  If price appreciation were included, ETF and mutual fund costs would be higher than those given, because these costs are based on a percentage of assets under management.

		Cumulative commissions & expenses
Year	Total invested	Stocks	lowest cost ETF	lowest cost mutual fund
1	$5,000	$    65	$        37	$               65.50
2	$6,000	$    78	$        79	$             144.10
5	$9,000	$   117	$      233	$             458.50
10	$14,000	$   182	$      586	$           1,244.50

The stock investor following this strategy will save money in the first year compared to even the least expensive mutual fund available (the Winslow Green Growth Fund), and by the second year compared to the least expensive clean energy ETF (the iShares S&P Global Clean Energy Index.)

A Quick Way to Choose Clean Energy Stocks

All this assumes the investor has the time to spend to pick appropriate stocks.  For a small investor like the one in the example, the time required will need to be minimal.  With literally hundreds of clean energy stocks to choose from, the task seems monumental.  It doesn't have to be.

One simple way is to look at the top holdings of a few clean energy mutual funds, and pick your stocks from among those.  By making sure to spread your holdings over different alternative energy sectors (Wind, Solar, Efficiency, etc.), you'll be able to maximize your diversification.  Our CleanTech Stocks page shows stock categories in the right-hand column.

The goal of this strategy would be to approximately replicate the performance of the funds, but to do so at much lower cost.   If this were done outside of a tax advantaged account such as an IRA, after-tax performance could be enhanced further by selling losing stocks in order to shield capital gains or even a little ordinary income from taxation, and replacing them with similar companies.

Tomorrow I'll take a look at Clean Energy mutual fund holdings to see what this portfolio might look like. (The link will be broken until then.)

Tom Konrad, Ph.D.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 09:54 PM | Permalink | Comments (6) | TrackBacks (0)

A Choice of Alternatives

There are now 6 mutual funds focused on what I usually refer to as "Clean Energy."  I use this designation because "Renewable Energy" does not include Energy Efficiency, which is the most cost effective and scalable way of cleaning up the economy, while "Alternative Energy" usually is taken to include such technologies as nuclear and coal-to-liquids.  

Nuclear may have low carbon emissions, but security concerns, waste disposal, and cost all lead many investors who wish to green up their portfolios reluctant to invest.  Coal-to-Liquids companies such as Rentech (RTK), in contrast, emit as much or more carbon than would be emitted by the use of the same amount of conventional petroleum products.  As a strategy to cope with peak oil, coal to liquids only makes sense if you ignore the climate impact, and hence these companies cannot be considered clean, even if they are alternative.

The six mutual funds which mostly focus on such clean energy technologies (as opposed to the broader categories of Cleantech or Socially Responsible/SRI) are the American Trust Energy Alternatives Fund (ATEAX), the Calvert Global Alternative Energy Fund (CGAEX), Firsthand Alternative Energy (ALTEX), Guinness Atkinson Alternative Energy Fund (GAAEX), New Alternatives Fund (NALFX), and Winslow Green Growth Fund (WGGFX).  In general, all of these have relatively high expense ratios, even for actively managed mutual funds, but if you are uncomfortable trading the Clean Energy ETFs or individual stocks, these are your choices.

A Renewable Mutual Fund in Your 401(k) Plan?

Another reason to use a mutual fund rather than an Exchange Traded Fund (ETF) is if you're investing through a 401(k) plan.  Although most 401(k) plans do not offer a Renewable Energy Fund as an option, there is a movement to encourage companies to add them with a Federal tax credit.  There's also a how-to guide both for individuals trying to encourage their companies to add such funds, and for companies which want to include such funds in their plan.  

If your company is planning to add such a fund, it makes sense to add the one which will bring the best diversification at the lowest cost, and that's what this article is about.

Cost

Many fund advisors will say that their expense ratios are high because the funds are still small.  In some part, that is true, but the fees are also high because there simply is not enough competition, and most people investing in one of these funds spend more time thinking about the environment than about what they're paying to protect it.  In my view, it's important to protect the environment, and worth spending a great deal of money on, but that money should be spent wisely, in order that it be used to greatest effect.

There are two types of fees you will encounter: Front-end loads and ongoing expenses.  

 

Load Funds

A Front-end load is the percentage of your money which you pay to get into the fund, under the rationale that this allows the fund to charge lower ongoing expenses.  If you are only considering mutual funds, and are confident that you will leave your money in the fund for many years, then a load fund may make financial sense.  

The funds with Front-end loads are the Calvert Global Alternative Energy Fund (class A), and the New Alternatives Fund.  Both have front- end loads of up to 4.75%, after which the Calvert fund's expense ratio is 1.85%, and the New Alternatives fund's expense ratio is 0.95%, making New Alternatives the far better choice of the two.  Most of these funds also have fee for early withdrawal, or back end load, but only if money is not kept in the fund for a minimum period, usually 6 months or a year.

Front-end loads do fall with the amount invested, and are often waived for institutional investors, such as 401(k) plans. Calvert offers class A shares with no sales load to 401(k) and similar retirement plans, but New Alternatives does not seem to.

No-Load Funds

No-load funds recoup their expenses over time, and this cost is expressed in the expense ratio, which is the percent of assets every year which go to the fund manager for expenses and the manager's profit.  For the no-load funds, here are the expense ratios:

Fund Name	Expense Ratio Investor/Institutional	Minimum initial  investment (Standard/IRA)
Firsthand Alternative Energy Fund	2.10%/-	$2000/$2000
American Trust Energy Alternatives Fund	1.89%/-	$5000/$2500
Calvert Global Alternative Energy Fund, Class C/ Institutional A	2.85%/1.85%	$2000/$2000
Guinness Atkinson Alternative Energy Fund	1.64%/-	$5000/$1000
Winslow Green Growth Fund	1.31%/1.06%	$2500/$2000

Investor shares are those offered to the public, but a 401(k) plan would qualify for the lower expenses available to institutional investors.  

In this fee comparison, the Winslow Green Growth Fund wins out, since it not only has one of the lower minimum investments, but also has the lowest expense ratio.  The Winslow fund also compares favorably to the New Alternatives fund, since it would take about 9 years for the lower expense ration of the New Alternatives fund to pay back the cost of the front- end load. 

Holdings

The other factors to consider are the funds' holdings.  Do they invest globally?  Are they overly concentrated on particular sectors, such as solar?  How much of their money is invested in clean energy?

Unlike some of the ETFs, all of these funds invest globally.  However, reading the fund descriptions, you will find that the Winslow fund is focused on "environmentally responsible" companies, while New Alternatives "It usually invests at least 25% of assets in common shares of companies which have an interest in alternative energy."  In contrast, the other funds are all at least 80% committed to alternative energy.

Those are just the investment guidelines, however.  More important is how the funds are actually invested.  I looked at the top ten holdings of each, and here is my categorization of their holdings, and here is the breakdown over major clean energy categories.  I combined technologies such as wave power, batteries, and geothermal into the "Other clean energy" category because of the small amounts held.  With diversified renewable energy companies, I split the ownership between the various categories based on my judgment of how much of the company was involved in each business.

Top ten holdings can change any time, but this should at least be an indication of the general thrust of each fund's strategy.

On the assumption that investors are not buying these funds because they want a fund that is very much focused on clean energy, a fund's investments in the "Utility" and "Non-energy" categories are mostly wasted.  The utility companies in these funds are the greener electric and gas utilities, but they still derive the majority of their energy from fossil fuels.  Additionally, I currently expect regulated utilities to underperform for the next year or two.  

In contrast, I think that clean energy investors should strive to emphasize energy efficiency companies in their portfolios.  This is for the same reason that we do energy efficiency first before installing renewable energy systems on our house.  Energy efficiency measures are much more cost effective.  Most energy efficiency measures pay for themselves in just a few years, and that is why energy efficiency features so prominently in the stimulus plan: the economy will get a short term boost from the spending, but there will also be larger long term gains from the energy savings over time.

Also because of economics, I prefer investments in Wind companies to Solar companies, so despite the large investment of the Winslow fund in two medical companies and an internet company, I still think it has the best portfolio of the six, followed closely by the American Trust Energy Alternatives Fund.

My Top Pick

If you can, you are better off buying one of the clean energy ETFs, or even a portfolio of individual clean energy stocks (here are 10 clean energy picks for 2009.)  However, it you want a mutual fund for the ease of investment, or you are looking to add one to a retirement plan, the Winslow Green Growth Fund comes out on top with its emphasis on energy efficiency stocks (including these two Geothermal Heat Pump stocks), and its lower expenses.

Here's how to invest in the Winslow Green Growth Fund.  Don't forget to read the prospectus.

Tom Konrad, Ph.D.

DISCLOSURE: The Guinness Atkinson Alternative Energy Fund is an advertiser on the author's website, AltEnergyStocks.com.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 03:52 PM | Permalink | Comments (3) | TrackBacks (1)

When I first came across ProShares' UltraShort ETFs, I thought they were a brilliant idea.  They seem to promise a multitude of advantages for investors:

• The ability to hedge market or sector exposure without having to go short.  (Going short requires a margin account, and US law prohibits the use of margin in most retirement accounts.)
• They should have a better risk profile than shorting.  With an UltraShort, you can't lose more than your initial investment.  With true shorting, the potential losses are unlimited.  As the underlying index rises, each percentage gain creates a smaller dollar fall, while successive declines in the market index should produce successively greater gains.
• They should tie up less capital than Short ETFs for a similar effect.
• Unlike with option strategies, there is no need to choose an option expiration date by which the market move will have occurred.

Unfortunately, it's not so simple.  All Short, UltraShort, and Leveraged ETFs under-perform the seemingly equivalent long or short position in the underlying index, and the underperformance will be worse the greater the leverage and the more volatile the underlying index.  This is stated in the prospectus, but the fund sponsors understate the magnitude of the problem.

I'm far from the first person to write about this.  In fact, I made the mistake of including an UltraShort ETF in my 10 Clean Energy Stocks for 2009 as one option for a market hedge, because I feel that the downside risks for the market as a whole this year outweigh the upside potential, and I expect that many of my readers may not be using margin accounts.  The other possible hedge I mentioned was to "reduce the allocation to large cap stocks" elsewhere in the portfolio.   In some ways, my inclusion of SDS in the list was fortunate, because a commenter trashed UltraShorts, and brought the problem to my attention. 

The Bad, The Worse, and the Appalling

Others have done a decent job of explaining why leveraged funds underperform, as well as looking at the evidence in the historical data, but despite considerable time on the subject with Google, I have not seen any quantification of the penalty an investor in these funds will pay.   So I did an experiment.  I put together a spreadsheet which randomly generates a year's worth (200 trading days) of data from an index for which the daily percentage move follows a normal distribution, except the last 10 days which are calculated to bring the index back to its starting value.  

I recalculated my spreadsheet about 30 times each for 1%, 2%, 3%, 4%, and 5% standard deviation of the distribution of percentage changes in the underlying index.  The table below shows the range of percentage losses I observed for each type of leveraged ETF.  I was a bit surprised to note that Short ETFs and Ultra (x2) ETFs had approximately the same underperformance, while UltraShort (x-2) and Triple (x3) leveraged ETFs also seemed to have the same long term underperformance/frictional losses.

Mostly, I was appalled.

Standard Deviation of Daily Index Returns	1 Year Leveraged ETF Underperformance / Frictional Losses
	Short (x-1) and Ultra (x2)		Ultrashort (x-2) and Triple (x3)
	Min	Max	Min	Max
1%	1%	4%	4%	8%
2%	7%	13%	18%	26%
3%	14%	24%	34%	53%
4%	24%	43%	64%	74%
5%	32%	60%	67%	96%

Examples

I feel the need to give examples of how to read the above table, because some readers might suspect that they don't understand the results.  I did the calculations myself, and I can barely believe them. 

Based on data from October 22, 2008 to January 26, 2009, the S&P 500 had a daily standard deviation of 3.62%.  If you were to invest in SDS, an UltraShort ETF which has the S&P 500 as its underlying index, and were to hold it for a year, you should expect to lose between 34% and 74% of your money, if the S&P 500 is flat for that period.  This assumes that there are no transaction costs, and that the expense ratio is 0% (in fact, it's 0.91%.)  My experiment also assumed that daily stock market returns follow a normal distribution.  In fact, the the distribution of daily stock market returns is leptokurtotic (it has fat tails.)  According to my mathematical intuition (the Ph.D. is in math, in case you were curious,) if I had performed the experiment with a leptokurtotic distribution, the losses would have been larger.  Obviously, this could be checked, but the results are bad enough as it is.

To put this another way, if your frictional losses were in the middle of the 34-74% range (55%, including the expense ratio,) the S&P 500 would have to drop 27.5% (=55%/2), for you to just break even.   In 2008, the S&P 500 fell 39%.   If you wanted to make a profit by buying SDS on January 1, and holding it until the end of December, the S&P 500 would have to fall from $903 on January 1 to below $654 by the end of the year.  You would do much better (by limiting your potential losses and making profits on a smaller drop in the S&P 500) by buying December 2009 puts on SPY, an unleveraged ETF which tracks the same index.

It simply does not make sense to hold these funds for anything more than a few days (if that.)  The S&P 500 is one of the least volatile indexes around, so the example above is a mild one.   One reader of my recent crude oil speculation article suggested that I use DXO (an Ultra) or ERX (a Triple) instead of OIL.  Using historical data from October 23, 2008 through January 28, 2009, the daily volatility of OIL was 5.18%, implying a 67% to 96% loss in ERX over the course of a year if crude oil prices do not rise.  Although I expect oil prices are headed up, I'm not willing to bet it will happen in the next couple of weeks (over which time an investor in ERX might expect to lose 1-2% if crude prices did not rise.)  

It is worth noting that current volatility is much higher than it has been historically.  However, volatility always goes up in bear markets, precisely the time I would want to use these as a hedge.

What Can You Do?

Short and UltraShort ETFs are not appropriate for creating a long (or medium) term hedge.  In a brokerage IRA, the only effective hedging option I can think of is to purchase long-term puts, or to sell covered calls on the positions in the account.  Both these strategies require option trading authority, which most brokerages will grant to experienced or knowledgeable investors.   

I have avoided buying puts in the past because they, too, lose value over time.  However, if hedging is important to you, the time-value loss can be minimized by buying deep in-the-money puts, at the expense of tying up capital and increasing your potential losses.  Selling covered calls is a strategy I use frequently, but this is more of an income-producing strategy.  The potential of covered calls to offset a large loss is limited.

If you can, however, it's probably better to create a hedge for the positions in your IRA in a taxable margin account, where many more tools are available.

Tom Konrad, Ph.D.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 05:03 PM | Permalink | Comments (6) | TrackBacks (0)

In my recent article about Green Energy Exchange Traded Funds (ETFs), I said that there were two main criteria investors should consider when choosing one (the fund's expense ratio, and its investment universe.)  This is true for investors who are looking for a single investment in alternative energy, but if you are a more sophisticated investor or speculator, there's another important criterion: Is there a market for exchange traded options on the ETF?

I personally love selling (a.k.a. "writing") options.  If the stock market is a casino, option sellers are the house.  Longtime readers will recall my article last year about cash covered puts.  Using cash covered puts, an option writer will either 1) end up owning a stock at a price that seemed good when he wrote the put, or 2) make a high return on the capital he risks (see the link above for details.)

The other type of option writing I use is covered calls. When I already own a stock or ETF, and would not mind selling at some price X, I write a call at X, and collect a premium.  This is an especially attractive strategy when you expect that the market is not likely to make large gains anytime soon.  I also use this strategy with any stock I want to sell.... I write covered calls with strike prices slightly below the current price, and either end up selling at slightly more than the current price, or collect substantial premium income.  I mentioned this strategy in my article When to Sell: Five Rules of Thumb last year (Rule #4).

Other Strategies

None of these ETFs have liquid enough options markets to execute more complex options strategies such as  spreads or straddles.  However, speculators looking for leverage and increased profit potential are likely to be interested in buying calls or puts.  For many investors, this is the first option strategy they try, partly because it is the easiest for which to get option trading authorization.  Although most options expire worthless, the potential loss is no more than the premium you pay, so monitoring overall risk is much easier than with option-writing strategies.

Clean Energy ETF Options

Since I focus on investing in individual renewable energy and energy efficiency companies, I don't usually use renewable energy and energy efficiency ETFs or mutual funds.  The exception to this is when I have some expectation for the sector as a whole, or for one of the sub- sectors for which there are ETF trackers, such as Wind and Solar. 

The problem is, exchange traded options markets are always considerably less liquid than the markets in the underlying security.  In illiquid markets, it almost always makes sense to accept the risk that a trade may not go through in order to get a specified price by using limit orders.  But in order to have a chance of the trade executing with a limit order, the more liquid the market the better.

Therefore, when I dabble in ETFs, I seldom use the same ones I recommend to passive investors: I choose the ones with the most active options markets.  They are:

Whole-sector Clean Energy ETFs: PBW.  None of the other whole-sector ETFs (QCLN, ICLN, GEX, PBD) has exchange traded options on it, so the choice is simple.

Wind ETFs: FAN.  Again, the other sector ETF (PWND) does not have options traded on it.

Solar ETFs: TAN. Although the other Solar ETF, KWT, also has options which trade on it, the number of options outstanding on TAN is far greater, a clear indication of greater market liquidity.

Carbon ETFs: Neither of these (ASO, GRN) has options traded on it.

All of this explains my disclosure below.

Tom Konrad, Ph.D,

DISCLOSURE: Tom Konrad has written puts on PBW and FAN.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 04:10 PM | Permalink | Comments (3) | TrackBacks (0)

UPDATE: Here is an analysis of Clean Energy ETFs that takes an in-depth look at portfolio composition.

For investors looking for diversified exposure to Alternative Energy, Exchange Traded Funds (ETFs) are the best option.  I have not found any statistical evidence that actively managed alternative energy  mutual funds can beat the market (and hence justify their higher fees,) so lower expense ratios make ETFs compelling.  Since last year, the wide variety of Alternative Energy ETFs also makes it possible to even speculate on subsectors.  People who expect Solar, Wind, or even Carbon Trading  to do better than Alternative Energy stocks as a whole now have an easy way to place their bets.

Investing in Green Energy as a Whole

For investors who want exposure to Alternative Energy, but don't have an opinion about particular stocks or subsectors, there are two factors to differentiate between ETFs:

1. Domestic (US) or Global?
2. Expense ratios.

All else being equal, a lower expense ratio is always better.  Expenses, even small ones, can greatly reduce the overall return of your investment over time.  The choice of a domestic ETF vs. a global one is a bit more complex.    With the new Obama administration firmly behind the New Energy economy, it's easy to believe that US alternative energy companies may do better in the near future than global ones, which would push you towards domestic ETFs.  However, global companies tend to be larger and more established, and are also likely to be a better diversifier for most US investors who already own mostly US stocks, making Global ETFs a better choice for a more conservative investor. 

Domestic ETFs
Name	Ticker	Expense Ratio
First Trust NASDAQ Clean Edge US Liquid	QCLN	0.60%
PowerShares Clean Energy	PBW	0.60%

Global ETFs
Name	Ticker	Expense Ratio
iShares S&P Global Clean Energy Index ETF	ICLN	0.48%
PowerShares Global Clean Energy Portfolio	PBD	0.75%
Van Eck Global Alternative Energy Fund	GEX	0.65%

Given that ICLN brings the advantages of greater global diversification, and a lower expense ratio, ICLN is now my top choice for a single investment in Alternative Energy (I previously preferred GEX, because ICLN was not available before June 2007, and I was not aware of it for some time.  I suspect that part of the lower expense ratio arises from a smaller marketing budget.  If there are any Alternative Energy ETFs I'm currently missing, please let me know in the comments.)

Solar, Wind, and Carbon ETFs: Speculating on Sectors

I personally believe that Obama's push to double US renewable energy in three years is likely to help Wind and Geothermal stocks more than other renewable energy sectors.  While there is no Geothermal ETF, the sector does have a dominant company, Ormat (NYSE:ORA).  Without the ETFs, however, it would not be as easy to speculate on Wind, because not only is there no dominant company, many of the leaders do not trade in North America.  

Similarly, while there are many North American listed Solar companies, several of the leaders do not trade here.  Finally, there are two Carbon ETFs (one's technically an "Exchange Traded Note" but this is likely to make little difference to most investors), which track the price of CO₂ credits in different markets.  

Wind ETFs
Name	Ticker	Expense Ratio
First Trust Global Wind Energy Index	FAN	0.60%
PowerShares Global Wind Energy	PWND	0.75%

Solar ETFs
Name	Ticker	Expense Ratio
Claymore/Mac Global Solar Index ETF	TAN	0.65%
Market Vectors/Van Eck Global Solar Energy ETF	KWT	0.65%

Carbon ETFs
Name	Ticker	Expense Ratio
AirShares EU Carbon Allowances Fund	ASO	0.85%
iPath Global Carbon ETN	GRN	0.75%

If you are trying to decide between each type, the expense ratio is unlikely to be important to you for short term speculation.  Rather you will want to find the one that will benefit most if your investment thesis is correct.  For that, take a look at these comparisons of the Solar ETFs, Wind ETFs, and Carbon ETFs.

Tom Konrad, Ph.D.

DISCLOSURE: Tom Konrad has written puts on PBW,  and FAN, and owns ORA.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:39 PM | Permalink | Comments (2) | TrackBacks (0)

UPDATE 2/23/09: Here are in depth looks at available Clean Energy ETFs and Clean Energy Mutual Funds.

In my articles about Clean Energy Mutual Funds and Exchange Traded Funds (ETFs), I usually say:

Given the complex nature of the technologies, and the sparse coverage of many of the companies by industry analysts, there is still considerable room for active management in [Alternative Energy].  Many investors buy Renewable Energy stocks for emotional reasons, so an understanding of practical behavioral finance may lead to excellent buying opportunities in quality companies.

My recent update on the not-so-bad-as-might-have-been-expected performance of my ten speculative picks for 2008 might be an example of this.  Or it might have been luck.  But I'm not the only one trying to beat the market in alternative energy, actively managed mutual funds are also trying.  This is the only rational justification for paying their high fees.  If, after fees, an actively managed mutual fund has a higher return than a passively managed index fund or ETF, then it is worth paying the fee.  If the gains from active management are not enough to pay for the fees, then they are not worth paying.

Fund Name & Ticker	Active?	Global?	2008 return*	2007 return
Calvert Global Alternative Energy Fund (CGAEX)	Yes	Yes	-59%	N/A
Firsthand Alternative Energy (ALTEX)	Yes	Yes	-51%	N/A
Guinness Atkinson Alternative Energy Fund (GAAEX)	Yes	Yes	-68%	41%
First Trust NASDAQ Clean Edge US Liquid (QCLN)	No	No	-67%	N/A
New Alternatives FD Inc (NALFX)**	Yes	Yes	-46%	32%
PowerShares Clean Energy (PBW)	No	No	-70%	58%
PowerShares Global Clean Energy Portfolio (PBD)	No	Yes	-63%	N/A
Van Eck Global Alternative Energy Fund (GEX)	No	Yes	-64%	N/A
Winslow Green Growth Fund (WGGFX)	Yes	Yes	-63%	+23%

* through Dec 27, 2008.  ** The New Alternatives Fund charges a front-end load, as well as an annual management fee, so actual investor returns will be lower than those shown.

Drawing Comparisons 

Because the First Trust NASDAQ Clean Edge and Powershares Clean Energy ETFs (shown in white above) only contain US-traded stocks, I have eliminated them from the comparison.  The differences in performance are more likely to be dominated by the different investment universes than the difference between active and passive management.  Most well-established alternative energy players are foreign, so domestic-only funds are likely to contain a higher proportion of  more volatile stocks.  This means that domestic funds will tend to outperform in good years, and under-perform in bad.  This prediction is borne out by the performance figures above: QCLN and PBW underperformed nearly all the global funds in 2008, and PBW outperformed the three global funds which were around for all of 2007.

Among the global funds, the actively managed funds (shown in green) had performances ranging from -68% to -46% in 2007, with an mean of -57.4% and a standard deviation of 8.9%.  The passively managed funds (blue) had performances of -63% and -64%, both of which were within a single standard deviation of the mean performance of the actively managed funds.  Statistically, this means we can't draw any conclusion about the effect of active management on the returns of these funds.  

If the returns for my ten speculative picks (-55% for 2008) are included in the active management, the active management mean increases to -57.0%, and the standard deviation drops to 8.0%, but the comparison remains inconclusive. (Statistics geek note: Technically, I should be using a two-sample t-test to compare the two populations, but that test will always be inconclusive if the informal z-test I went through above is inconclusive.)

Finally, if we include the two passively managed domestic ETFs, the mean of the passive sample becomes -66%, and the standard deviation 3.1%.  This also fails the two-sample t-test for statistical significance at the 95% confidence level.  Although it comes close to statistical significance, the inclusion of domestic-only funds in the passive sample would have made even a statistically significant result suspect.

Conclusions

With this data, there's no statistical reason to believe that the actively managed funds are any better (or worse) than the passive funds.  Since the management fees of the actively managed funds above are typically two to three times as high as the passively managed funds, the evidence still points to the passively managed funds as the best pick.

However, if you are willing to take the time to manage your own money actively, and do not consider the time it takes as a cost, the returns above show that it's not difficult to beat most of the available funds just by reading this blog.  (As with actively managed funds, we don't know if my results were due to luck or skill.)

On New Year's Eve, I will publish an article with ten clean energy picks for 2009 (the link will be broken until then.) 

Next year, we'll have at least twice as much data.

Tom Konrad, Ph.D.

DISCLOSURE: GAAEX is an advertiser on the author's website, AltEnergyStocks.com.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:12 PM | Permalink | Comments (2) | TrackBacks (0)

A couple of weeks ago, I wrote about a recent report claiming that solar PV was going to be at the fore of the "cleantech revolution." I've never doubted solar PV's potential. What I like most about it, besides the fact that it's the most abundant energy form on Earth, is the ability for solar technologies to be deployed either through the building stock as a load-abatement measure or in large arrays of panels as solar parks. No other power generation technology can be scaled simultaneously through these two routes.

Besides investments in Energy Conversion Devices (ENER) and Suntech Power (STP) in 2006, I've largely stayed away from solar PV stocks in the past two years. For one thing, the onslaught of coverage initiation from the sell-side has made it difficult to gain a real informational edge for a retail investor such as myself. Throw on top of that the onslaught of retail investor interest in the sector, and you're starting to have a very unattractive asset class as far as I go. Investing in solar has become, over the past three years, either about momentum trading or the belief that incredibly rich valuations will endure for a while.

There's no doubt that the bashing of solar stocks that has taken over the past few months has rekindled many people's interest in the sector, including my own. Although from a fundamental point of view the ugliest is probably still to come for solar, there is no doubt that the space is looking a lot cheaper than it did six short months ago. With the overall market seeming like it's begun the process of finding a bottom, is now a good time to consider entering the solar PV space for the long-run (>18 months)? Even though I do think solar will probably continue to underperform for a few more months, I have been thinking about re-entering the space as a long-term play since I mostly share the perspective put forth in the report. Moreover, since I'm a lousy market-timer, now seems like a good time to get in and I'd prefer to sit through a bit more downside than to let upside escape me because I haven't timed my entry appropriately.  

Since I haven't been following the space closely over the past couple of years, and because there is a good deal of uncertainty out there, my preferred approach is to go with one of the two solar ETFs: the Claymore/Mac Global Solar Index ETF (TAN) or the Market Vectors/Van Eck Global Solar Energy ETF (KWT). This approach allows me not to have to do a detailed analysis of any one company in particular, a process which can be very time consuming for someone not intimately familiar with the sector. Moreover, the portfolio approach inherent to ETF investing allows for a spreading of risks. I've therefore conducted an analysis somewhat similar to the one I did for wind ETFs a few months ago.

Solar ETFs              

Solar ETFs: Basic Metrics
Item	TAN	KWT
Expense ratio	0.65%	0.65%
# securities in portfolio	25	35
Weighted avg. PE	34.5 (Sep. 30)	33.97 (Oct. 31)
NAV/closing pr (12/12)	0.987	1.008

As can be noted from the table above, the PE figures available are a bit outdated and are therefore not particularly useful. For the NAV/closing price, large discrepancies can provide interesting long (NAV>closing prices) or short (NAV<closing price) opportunities. In this case, neither shows a huge difference between asset value per unit and closing price. Both ETFs have the exact same expense ratio. 

One of the key differences between these two securities is the number of stocks within each and the relative concentration of risk. For TAN with 25 stocks, the average holding accounts for 4.00% of total fund value, whereas for KWT with 35 the average holding accounts for 2.86% of total fund value. However, the top ten holdings make up about 64% of fund value for KWT versus roughly 58% for TAN - risk is therefore more concentrated at the top for KWT than it is for TAN. Top-ten holdings for both ETFs are as follows:

Solar ETFs: Top-10 Holdings
TAN	Weight	KWT	Weight
First Solar Inc.	11.21%	First Solar Inc.	13.68%
Renewable Energy Corp AS	6.95%	SolarWorld AG	9.85%
MEMC Electronic Materials Inc.	6.46%	Q-Cells S.E.	7.85%
Solarworld AG	5.66%	Suntech Power Holdings Co. Ltd. ADR	5.94%
SunPower Corporation	5.09%	Renewable Energy Corp. ASA	5.06%
Q-Cells AG	4.89%	Evergreen Solar Inc.	5.01%
Energy Conversion Devices, Inc.	4.60%	SunPower Corp. Cl A	4.57%
Evergreen Solar, Inc.	4.42%	PV Crystalox Solar PLC	4.52%
Yingli Green Energy Holding Co. Ltd. ADR	4.27%	Energy Conversion Devices Inc.	3.95%
LDK Solar Co. Ltd. ADR	4.20%	Yingli Green Energy Holding Co. Ltd. ADR	3.86%
TOTAL	57.75%	TOTAL	64.29%

The main thing I really wanted to examine was relative exposure to the various segments of the solar supply chain. At a broad level, my preference is for the ETF with the greatest exposure to the wafer, silicon cell and thin-film segments, all of which have higher barriers to entry because of larger technological requirements. I want to stay away from heavier weightings into the silicon end of the market because of the commodity nature of it, and the modules and installation ends of the market because of the low barriers to entry and relative labor-intensity. I thus classified stocks in the two ETFs into the following categories: silicon, wafer, cells, thin-film, module, installation, solar thermal, integrated and other. I created categories to account for the companies that span two segments, and companies that spanned three or more segments are considered integrated. "Other" is made up mostly of firms providing manufacturing technologies for solar firms.

Solar ETFs: Segment Allocation
Segment	TAN (% fund value)	KWT (% fund value)
Silicon	0.00%	0.00%
Wafers	16.62%	9.47%
Cells	11.61%	14.11%
Thin-film	15.81%	17.87%
Modules	2.64%	3.44%
Installation	0.00%	3.20%
Cells & Modules	10.63%	8.66%
Modules & Installation	4.66%	5.25%
Integrated	28.51%	30.36%
Solar Thermal	0.00%	1.85%
Other	9.53%	5.82%
TOTAL	100%	100%

Unsurprisingly, both firms have First Solar (FSLR), the recent poster boy for the solar PV sector's success, as their top holding. Also unsurprisingly, the largest category for both is "Integrated", as more and more firms try to extend their reach up and down the supply chain. Both ETFs are overall quite heavily tilted toward pure-play solar stocks with little in the way of indirect plays. These two ETFs don't provide as clear-cut an alternative to one another as do the wind ETFs. KWT has a slightly higher weighting in stocks in the "Modules" and "Installation" ends of the supply chain. Coupled with the higher concentration of fund value (i.e. risk) toward the top-ten holdings, that makes me lean toward TAN.    

Decision

As someone who hasn't followed the solar sector closely and am not intimately familiar with many of the companies, I'm hoping taking a position in one of the solar ETFs is a good way to benefit from the upside associated with solar's long-term potential. These two ETFs are relatively similar in terms of supply chain segment allocation, and are likely to perform in a roughly similar fashion. As I said above, I'm leaning toward TAN and have put in a buy order for it. Barring a major recovery of the solar sector in 2009 that would make me want to take profit - something I believe has a small probability of occurring - my time horizon is at least 18 months. I'll provide an update then.  

               

DISCLOSURE: Charles Morand does not have a position in any of the ETFs discussed above, but has an open buy order on TAN.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Charles Morand at 11:50 AM | Permalink | Comments (0)

Three weeks ago, I wrote on the year ahead for the US wind sector and said I would analyze the two new wind ETFs now available to US investors: the First Trust ISE Global Wind Energy Index Fund (FAN) and the PowerShares Global Wind Energy Portfolio (PWND).

While I don't currently have a position in either ETF as I expect headwinds in the US (no pun intended) to place downward pressure on some of the global wind stocks in the next few months (the US accounted for 27% of global installed capacity in '07), I still intend to get in post-November elections when things get brighter on the policy side.

While these two ETFs cover the same sector, they offer two distinct options for investors and are therefore worth exploring in more detail.

Basic Valuation Metrics

The table above features a few basic valuation metrics. The expense ratio is what it costs you to invest in the funds, and many active investors shun mutual funds on grounds that high expense ratios eat away at returns. One of the benefits of ETFs is that they offer expense ratios that are lower than those of mutual funds, and this holds true for alternative energy. In this case, the 0.15% difference between the two really isn't material and probably wouldn't weigh very heavily in my decision.

The PE and Price-to-book-value are where things get more interesting from my perspective. Based on these metrics - especially PE - PWND has a higher weighting in stocks that are considered pricey than does FAN. A PE of above 76 is considered very high (the long-term average for the S&P 500 is around 15, and it peaked at around 35 in the late 90s), although it's not unusual in the alternative energy industry. This data is a bit dated so this likely is lower now, albeit it probably remains above the long-term average for the market. Depending on what your position is on growth stocks, this may or may not matter much. If you have a value leaning and believe low-PE stocks outperform in the long run, then this may be a red flag.

With regards to the share price premium over net asset value at yesterday's close, this isn't an especially useful metric on its own, and would probably be more useful if examined as a trend over a longer period of time. Nevertheless, this is something worth keeping an eye on - an ETF trading at an important discount to its NAV could present an interesting buying opportunity, while the opposite could spell downside risk.

Finally, PWND holds 32 securities, whereas FAN holds 67. This implies that PWND's positions are on average larger than FAN's - the average security in PWND makes up 3% of the portfolio, whereas that figure is 1.67% for FAN.

Holdings

FAN's top ten holdings are somewhat more focused on the wind supply chain, whereas PWND has a more exposure to wind park operators. Again, as can be noted, PWND's positions are appreciably more concentrated than FAN's, with the top ten holdings making up about 65% of the portfolio Vs. 57% for FAN. Overall, I expect the supply chain to be less impacted by tightness in credit markets than park operators.

The following two graphs are based on categories I created. While both ETFs disclose their industry exposures on their respective websites (here for PWND and here for FAN), I wanted to dig a bit deeper to know what those exposures really meant in terms of the wind power value chain. I didn't know all of the companies so my superficial search might not have landed everything where it truly belongs, but by-and-large I believe this is a good approximation.

My categories are fairly self-explanatory, save perhaps the distinction between "Park ownership" and "Power gen". "Park ownership" refers to pure-play wind park and/or renewable power generation asset owners, whereas "Power gen" refers to larger electric utilities with exposure to a wide range of generation fuels.

We can note that, by market value of holdings, both funds are mostly focused on turbine makers and wind park owners - no big surprise here. One of the big differences is undoubtedly the fact FAN has three times the exposure to the Power gen sector than PWND does - this probably accounts in part for the PE differences between the two funds. Another notable difference is the comparatively smaller exposure to Blades FAN has relative to PWND, although I don't have an opinion one way or another on this.

Finally, country exposure. You will notice that in neither case does the final count come up to 100 - that's because in both cases only the top ten countries were provided. I'm not sure how much of a difference this makes, seeing as most of the top holdings are global businesses. This breakdown says nothing about the exposure of the underlying businesses to different geographical markets, which is arguably what matters most if you intent to hold the ETF for the medium or long term. Nevertheless, to some, this may be useful info in trying to time an entry point if you have an opinion on where each of these equity markets is headed.

Conclusion

These two ETFs offer distinct choices to investors, although the performance chart above tells a pretty similar story so far (and not a great one at that...). I view the recent downward pressure on the wind sector mostly positively because I like the space long-term and periodic hiccups provide good entry points.

PWND, with its more concentrated positions and greater focus on pure plays, probably offers a more direct way to play the space. If global wind stocks take off, you will experience greater capital appreciation with this one. However, those rich PEs and concentrated positions might be a red flag for more conservative investors.

FAN offers more diversification, and its larger exposure to the Power gen space might make it a tad less volatile. The top ten holdings have a greater concentration on the supply chain, which I believe will remain strong.

I am leaning towards FAN. I already have exposure to speculative wind in my portfolio, and would look to buying an ETF as a means of reducing my risks on a portfolio basis. I will provide an update on this after (and if!) I end up pulling the trigger.

DISCLOSURE: The author does have not a position in any of the securities discussed in this article

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Charles Morand at 06:46 PM | Permalink | Comments (0) | TrackBacks (0)

UPDATE 2/23/09: Here are in-depth looks at available Clean Energy ETFs (including 4 new ones) and Clean Energy Mutual Funds. (including 3 not listed here)

by Tom Konrad

For new investors looking to green their portfolios with clean energy, the first thought is usually mutual funds.  The following three are available in North America:

Mutual Funds	Expenses
New Alternatives Fund (NALFX)	0.95% + Sales load
Guinness Atkinson Alternative Energy Fund  (GAAEX)	1.64%
Calvert Global Alternative Energy Fund (CGAEX)	1.85%

Each of these funds has expenses which would be considered high by industry standards, although they have all dropped noticeably since I covered mutual funds in 2007.  High expense ratios are a considerable drag on long term performance.  To avoid high expense ratios, knowledgeable investors usually turn to index mutual funds and exchange traded funds (ETFs). 

There are no clean energy index mutual funds currently available, but recent years have seen a rapid proliferation of new exchange traded funds.  At current count, there are four ETFs focusing on clean energy,  as well as three sub-sector ETFs for the Solar and Wind sub-sectors.

Exchange Traded Funds (ETFs)	Expense ratio	Comments
Powershares Wilderhill Clean Energy Portfolio (PBW)	0.60%	The oldest ETF in the sector, this fund holds only US-traded companies.
Powershares Global Clean Energy (PBD)	0.75%	A better diversification alternative than PBW
Van Eck Global Alternative Energy Fund (GEX)	0.65%	This is my current favorite for a single investment in Clean Energy, due to the combination of a low expense ratio and a global focus.
First Trust NASDAQ US Liquid (QCLN)	0.60%	The advantage of the low expense ratio is offset by the disadvantage of a US-only focus.
Sub-sector ETFs	Expense ratio	Comments
Claymore/Mac Global Solar Index ETF (TAN)	0.65%	Global Solar companies
Market Vectors/Van Eck Global Solar Energy ETF (KWT)	0.65%	Global Solar companies.
First Trust Global Wind Energy Index (FAN)	0.60%	Global Wind Power companies.

I recently wrote in depth about the Solar and Wind ETFs, including how I might (and might not) use them as part of a larger portfolio.  For people looking for a single investment in clean energy, I prefer the diversification of the global ETFs.  Many leading renewable energy companies (especially in the wind sector) are not traded on North American exchanges.  Hence, for a person wanting a single investment in the sector, the Van Eck Global Alternative ETF (GEX) is currently the best option, followed closely by Powershares’ Global Clean Energy fund (PBD), because of its slightly higher expense ratio.  

DISCLOSURE: The Guinness Atkinson Alternative Energy fund is an advertiser on  Alternative Energy Stocks.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:00 PM | Permalink | Comments (1) | TrackBacks (0)

Update:You can find a comparison of FAN with PWND. a more recent wind ETF here.

Since I last covered clean energy mutual funds and ETFs, the sector has seen the launch of two solar ETFs (KWT the Market Vectors Solar Energy ETF from VanEck,  and TAN, the Claymore/MAC Global Solar Energy ETF.)   Continuing in the tradition of cute ticker symbols, First Trust's new global wind energy ETF is FAN.

I recommend that investors stay away from the (very expensive) green energy mutual funds, and invest either in one of the ETFs, or if they have a few tens of thousands of dollars to invest and are willing to roll up their sleeves a little, they buy a representative sample of the stocks (a "tracking portfolio") held by the mutual funds and ETFs, and save further on expenses.

The Problem with Tracking

The difficulty of tracking portfolios in clean energy for North American investors is that the wind sector is dominated by European companies, which can require considerable knowledge and cost to purchase.  This is why, in the past, I preferred GEX, the Market Vectors Global Alternative Energy ETF.  With the introduction of FAN, that problem is now solved.  The Fund's top three holdings, Vestas, REPower, and Gamesa are the world's leading wind turbine manufacturers, and between them control approximately half of the worldwide market for turbines.  Vestas alone has 23 percent of the worldwide market for wind turbines.  Wind power is the largest source of renewable electricity after hydropower, and also the fastest growing renewable electricity source.  It is also one of the most economical, producing power at a price comparable to the cost of generation from a newly built coal plant or natural gas turbine, and even cheaper in some locations.

The only major wind manufacturers in which a North American investor can easily buy are General Electric (GE) and Siemens (SI).  Since these are large conglomerates, wind turbines are only a small fraction of their business.  Both also have extensive exposure to other clean energy sectors, which is why they are included in the example portfolio below. 

Bright Contrast

In marked contrast, the new Solar ETFs do not greatly add to a retail investor's ability to invest in the solar space.  There are more public solar companies than I keep track of, so aside from speculating on short term movements of the solar sector, I see little reason to use the Solar ETFs.  Exposure to solar can be easily accomplished through individual stocks, or as part of the broader clean energy ETFs.  

I personally tend to underweight solar most of the time.  While I believe the solar sector will be a tremendous growth story, I also feel solar's potential is already well appreciated by investors.  This makes it difficult to find well valued solar companies.

A Model Portfolio

How would FAN be used as part of a larger clean energy portfolio?  If I had $20,000 to invest in clean energy companies today, for an investor with an above average risk tolerance, here's what it would look like (note, this portfolio is intended only as an educational example, not individual investment advice.  The particular companies chosen for each sector would also change due to changes in valuation, and a smaller (larger) portfolio or higher (lower) commissions would lead to fewer (more) companies being included.  

Transport		$7,000
	Bus - New Flyer (NFYIF)	$3,000
	Rail - Portec Rail Products (PRPX)	$1,500
	Rail - Greenbreier (GBX)	$1,500
	Batteries - Electro Energy (EEEI)	$1,000
Power		$8,000
	Wind - FAN	$2,000
	Transmission&Wind - Composite Tech Corp (CPTC)	$1,000
	Geothermal - Ormat (ORA)	$1,000
	Inverters - SatCon (SATC) or Xantrex (XARXF)	$1,000
	Storage - Active Power (ACPW) or Maxwell (MXWL)	$1,000
	Efficiency - Cree, Inc (CREE)	$1,000
	Efficiency - Waterfurnace (WFIFF)	$1,000
Diversified (see note *)		$5,000*
	Diversified - General Electric (GE)	$1,000*
	Diversified - Sharp (SHCAY)	$1,000*
	Diversified - ABB (ABB)	$1,000*
	Diversified - Johnson Controls (JCI)	$1,000*
	Diversified - Owen Corning (OC)	$1,000*

*Note: if I were investing as part of a larger portfolio, I would actually invest about $4,000 in each of the "diversified" companies (a total of $20,000 rather than $5,000), and reduce the broader portfolio's allocation to general large cap stocks by $15,000 to compensate for the limited exposure of these companies to clean energy.

This portfolio is not similar in composition to the existing ETFs... instead it heavily over weights my favorite sectors - efficient transport, and grid infrastructure, while almost ignoring popular sectors such as solar.  I do like wind, on the other hand, so FAN is a useful part of the portfolio, in addition to the wind exposures from CPTC, the inverter stock, and the diversified conglomerates.

DISCLOSURE: Tom Konrad and/or his clients have long positions in Gamesa, GE, SI, NFYIF, PRPX, GBX, EEEI, CPTC, ORA, STAC, XARXF, ACPW, MXWL, CREE, WFIFF, GE, SHCAY, ABB, JCI, OC.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:26 PM | Permalink | Comments (1) | TrackBacks (0)

UPDATE 2/23/09: Here are in depth looks at available Clean Energy ETFs and Clean Energy Mutual Funds.

UPDATE 7/23/08: Here is an updated look at Renewable Energy mutual funds and ETFs.

Why Invest in Renewable Energy?

Given all the attention that renewable energy is getting in the news over the last couple years, investing in renewable energy has become a hot topic.  People are drawn to renewable energy for one of several reasons:

1. To fight Global Warming
2. To prepare for Peak Oil.
3. To improve Energy Security and local economies.
4. To cash in on the above trends.

The beauty of investing in renewable energy companies is that these goals are not mutually exclusive.  With one investment, the investor can feel good about what his money is doing for three reasons, while putting his money in what is proving to be a spectacular growth story.

How To Invest

For mutual fund investors, Renewable Energy focused mutual funds have been few and far between, but the recent growth of interest in the sector has lead to a plethora of new offerings.  US investors can choose from load funds such as the  New Alternatives Fund (NALFX) and Calvert Global Alternative Energy Fund (CGAEX) and the no-load Guinness Atkinson Alternative Energy Fund (GAAEX).   Unfortunately, the load funds have expense ratios in excess of 1.25%, and the Guinness Atkinson fund's ratio is 1.98%.   Given these high expenses, I strongly prefer the industry ETFs.

The Powershares Wilderhill Clean Energy ETF (PBW) and NASDAQ Clean Edge U.S. Liquid Series ETF (QCLN) have expense ratios currently capped at 0.60%, high compared to a general energy sector ETF such as XLE (0.24%), but is a much more economical way to invest than the sector mutual funds.  Unfortunately, both of these ETFs track US-based indices, and so provide little international diversification.  The new Market Vectors Global Alternative Energy ETF (GEX), neatly solves this problem with a portfolio similar to the more diverse mutual funds, and an expense ratio of only 0.5%, which easily makes it my favorite fund in the space.  Also recently launched, the Powershares Global Clean Energy Portfolio (PBD) has broader diversification into a greater number of small cap companies, but given its expense ratio of 0.75%, an investor with over $5,000 to put into the sector could closely replicate PBD by splitting his allocation 50-50 between GEX and PBW or QCLN.

Given the relatively high expenses of the sector ETFs, I believe it makes sense for investors who are looking to invest $25,000 or more in the sector for a period of years to build their own ETF from individual stocks gleaned from the holdings of the above ETFs and mutual funds.  This also opens the possibility of focusing on established companies which are early movers into the renewable energy arena, a strategy which is less likely to lead to spectacular gains, but which also gives some protection against spectacular dot-com bust style losses.  Investors seeking a greater international exposure could mix GEX with a smaller portfolio of domestic companies.

UPDATE: 6/29/08 There are now also Solar and Wind ETFs (click for discussion)

Picking Individual Stocks

Given the complex nature of the technologies, and the sparse coverage of many of the companies by industry analysts, there is still considerable room for active management in the sector.  Many investors buy Renewable Energy stocks for emotional reasons, so an understanding of practical behavioral finance may lead to excellent buying opportunities in quality companies.

Many development stage renewable energy companies have declined considerably in the recent market correction triggered by the fallout from the US subprime mortgage market.  If market uncertainty continues, investors who bought these companies in response to excitement about their growth prospects will likely lose their nerve.  An understanding of the business models and technologies in the industry should provide the knowledgeable investor with the tool to differentiate the undervalued quality companies from the cheap trinkets that have been finally recognized for what they are.  

EDITORIAL NOTE: Currencies

This article was first published in UK-based The Price Report, issue 13, published by Tim Price, Chief Investment Officer for Global Strategies at UBP in London.  He added his own editorial note:

Continue reading "Investing In Renewable Energy 101" »

Posted by Tom Konrad at 08:54 PM | Permalink | Comments (3) | TrackBacks (0)

UPDATE 2/23/09: Here are in depth looks at available Clean Energy ETFs and Clean Energy Mutual Funds.

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.

Performance

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.

Posted by Jason Hamlin at 01:20 PM | Permalink | Comments (0)

UPDATE 2/23/09: Here are in depth looks at available Clean Energy ETFs and Clean Energy Mutual Funds.

UPDATE: An updated version of this article is available here. A discussion of Wind ETFs and Solar ETFs is here, as well as an updated look at Renewable Energy mutual funds and ETFs.

Why Invest in Renewable Energy?

Given all the attention that renewable energy is getting in the news over the last couple years, investing in renewable energy has become a hot topic.  People are drawn to renewable energy for one of several reasons:

1. To fight Global Warming
2. To prepare for Peak Oil.
3. To improve Energy Security and local economies.
4. To cash in on the above trends.

The beauty of investing in renewable energy companies is that these goals are not mutually exclusive.  With one investment, the investor can feel good about what his money is doing for three reasons, while putting his money in what is proving to be a spectacular growth story.

Internet Bubble Redux?

To many, this sounds too good to be true.  Many have pointed out the similarities between today's renewable energy boom and the internet bubble of the late 1990s.  The speculation has been intense, especially in ethanol and photovoltaic companies.  And, similar to the internet craze, many of the companies are no-profit startups, and even the established companies with a solid record of profits trade at nosebleed price multiples.  Yet the internet did not go away because the bubble burst; more people are shopping online and more business is moving online than ever before.  Most likely, you are reading this article online... would you have been doing that in 1997?  The forces behind the advance of renewable energy are at least as compelling as those behind the internet.

I believe that we are still in the early stages, but even so, we can learn valuable lessons from that last boom.  One of the most important lessons is that the first mover does not always have the advantage, and often the winners are established companies that see the trend, and get on it in a measured way over time.  But the analogy also has weaknesses.  The internet was characterized by its low barriers to entry and exit, leading to cutthroat competition and me-too sites.  With Renewable Energy companies operate mostly in a heavily regulated, capital intensive sector, a sharp contrast to the internet, which will likely make the boom happen in relative slow motion compared to the internet.  I believe we're much more likely to see a series of mini market bubbles during the ramp-up, than to see a single gigantic bubble, as we saw in the late 1990s.

How To Invest

For mutual fund investors, Renewable Energy focused mutual funds are few and far between.  US investors are limited to the New Alternatives Fund (NALFX) and the Guinness Atkinson Alternative Energy Fund (GAAEX).   The former has a 1.25% expense ratio despite the fact that it also has a front-end load, and while the latter is a no-load fund, its expense ratio is a pricey 1.98%.  Given these high expenses, I strongly prefer the Powershares Wilderhill Clean Energy ETF (PBW) and NASDAQ Clean Edge U.S. Liquid Series ETF (QCLN).  Both of these have expense ratios currently capped at 0.60%, which is high compared to a general energy sector ETF such as XLE (0.24%), but is a much more economical way to invest than the sector mutual funds.

Given the relatively high expenses of the sector ETFs, I believe it makes sense for investors who are looking to invest $25,000 or more in the sector for a period of years to build their own ETF from individual stocks gleaned from the holdings of the above ETFs and mutual funds.  This also opens the possibility of focusing on established companies which are early movers into the renewable energy arena, a strategy which is less likely to lead to spectacular gains, but which also gives some protection against spectacular dot-com bust style losses.  

Finally, I believe that, given the complex nature of the technologies, and the sparse coverage of many of the companies by industry analysts, there is still considerable room for active management in the sector.  Given the emotional nature of the reasons for investing in Renewable Energy, a good understanding of practical behavioral finance, as well as an understanding of the technologies are likely to be necessities for success in the active management of an alternative energy portfolio.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

Posted by Tom Konrad at 09:14 PM | Permalink | Comments (3) | TrackBacks (0)

UPDATES

2/23/09: Here are in depth looks at available Clean Energy ETFs and Clean Energy Mutual Funds.

7/23/08: Here is an updated look at Renewable Energy mutual funds and ETFs.

06/30/08 - Also: a discussion of Solar and Wind Energy Exchange Traded Funds.

10/7/07 - An updated version of this article is available here.

Mutual funds are often touted as an inexpensive way to achieve diversification.  With declining brokerage commissions, this is often no longer true.  If you are interested in investing in alternative energy, is a mutual fund or ETF right for you?

Here are the currently available mutual funds and ETFs of which I'm aware with alternative energy type themes:

Fund Name	Emphasis	Mgmt Style	Load?
		Turnover
		Ticker	Expense Ratio
Guinness Atkinson Alternative Energy	Alternative Energy & Energy technology; International	Active	No-load
		22%
		GAAEX	1.98%
New Alternatives Fund	Renewable Energy & environment	Active	4.75% under $25K
		40%
		NALFX	1.25%
Powershares Cleantech Portfolio	CleanTech	Index	ETF
		low*
		PZD	0.70%
Powershares Wilderhill Clean Energy	Greener and Renewable Energy	Index	ETF
		6%
		PBW	0.71%
Powershares Wilderhill Progressive Energy Portfolio	Nuclear and Advanced Fossil Fuels	Index	ETF
		low*
		PUW	0.70%

* These funds are too new to have published turnover ratios, but I anticipate that they will have low turnover (<10% annual) because they are index funds.

 

Diversification reduces the company-specific risk of a portfolio, but leaves market and sector risk.  Most of these benefits can be captured with a 30 stock portfolio, with greater benefit accruing to investors who make a conscious effort to choose dissimilar companies.  So to determine if a mutual fund, ETF, or stock portfolio is the most cost-efficient way to achieve diversification I will compare the costs across portfolio sizes and time horizons.

The following chart shows the amount of money you will have after the given time period, assuming that the underlying stocks return 10% per year, and dividends are reinvested (which can be accomplished commission-free via DRIPs in a stock or ETF portfolio.)  The 10% return is simply a guesstimate included for demonstration purposes and is in no way to intended to be an actual prediction of returns.  There is never any guarantee of future results.

Values in bold indicate the best investment option (given these assumptions) for any time period/initial investment combination.

Initial Investment	1 year	3 years	5 years	10 years
$1,000 in GAAEX (only available for IRAs)	$1082	$1266	$1463	$2119
$1,000 in NALFX	N/A	N/A	N/A	N/A
$1,000 in Powershares	$1076	$1282	$1536	$2397
$1,000 in 30 stocks	$605	$732	$886	$1427
$2,500 in GAAEX (only available for IRAs)	$2700	$3151	$3677	$5407
$2,500 in NALFX	$2590	$3063	$3622	$5509
$2,500 in Powershares	$2716	$3245	$3876	$6047
$2,500 in 30 stocks	$2255	$2729	$3301	$5317
$5,000 in Powershares	$5449	$6509	$7776	$12,130
$5,000 in 30 stocks	$5005	$6056	$7328	$11,801
$10,000 in Powershares	$10,914	$13,038	$15,576	$24,297
$10,000 in 30 stocks	$10,505	$12,711	$15,380	$24,770
$20,000 in Powershares	$21,843	$26,095	$31,175	$48,630
$20,000 in 30 stocks	$21,505	$26,021	$31,486	$50,707

An examination of the chart reveals that, at the minimum investments ($2,500 for non-retirement accounts) for NALFX and GAAEX, it is always cheaper to buy one of the Powershares ETFs for a $15 brokerage commission than to pay the high expense ratios and possible load for the traditional mutual funds.  Even the $1000 minimum for retirement accounts allowed by the GAAEX is only a bargain for holding periods less than three years, after which the nearly 2% expense ratio eats too much into the gains.

This demonstrates the well known advantages of using low-cost index funds (in this case index-ETFs) over traditional mutual funds, but as we move to accounts in the tens of thousands of dollars with longer holding periods, even the low 0.7% expense ratios of the Powershares ETFs start adding up, and paying $15 a trade to buy a portfolio of 30 stocks begins to look better.  If you consider that $15 a trade is fairly costly for most online discount brokers these days, and many offer free trades for qualifying accounts.

This leads to the question, if your alternative energy portfolio is in the sweet spot to use the Powershares ETFs, which one(s) should you choose?  The answer will depend mainly on what motivates you to invest in Alternative Energy in the first place.  If you're most interested in Global Warming, you will gravitate towards PBW.  PUW caters to investors concerned about energy security, and PZD companies focus most strongly on traditional environmental issues such as pollution.  For a $3000+ portfolio, the extra commissions involved in splitting your portfolio between two or three will not have a significant impact on your returns.  Or you could buy one, and when then buy a different one when you have more money to invest.

Finally, if you have $20,000 or more to invest, and and can leave it there for a few years, what stocks should you choose? If you don't have time to educate yourself about alternative energy stocks, the simplest way to go about it is look at the holdings of the mutual funds or ETFs you would have bought, if they were not too expensive. PBW, PZD, and PUW have lists of holdings that are particularly easy to use.  It may strike you as strange, to buy a basket of stocks with so little research into the actual companies, but that is exactly what you are doing when you buy any index fund... this technique just lowers the fees if your account is the right size.

Caveats

I have ignored some oft-cited advantages of mutual funds in this analysis, most importantly the ability to make small, regular investments for dollar cost averaging.  I consider this more a matter of self-discipline than good investment strategy.  The point of dollar cost averaging is to discipline ourselves into buying more of a fund when it is relatively inexpensive, and less when it is more expensive (even when we don't really know what expensive or inexpensive is.) Nevertheless, if automatic payments are the only way to force yourself to invest, you can always set up automatic payments into a money market mutual fund, and whenever that fund reaches some fixed amount over something like $1000, you can invest the money in an ETF, or add a stock to your portfolio.  These investments can be used to maintain a balanced portfolio by always investing in underperforming sectors.

None of the investment options I have discussed are truly diversified portfolios; a diversified portfolio will contain investments in a broad range of industries and asset classes.  For most investors, alternative energy should account for only a fraction of the entire portfolio.  If investment in alternative energy is taken as part of a broadly diversified overall portfolio, there is less need to own as many individual stocks for diversification, so long as no one stock comprises more than 2-4% of the entire portfolio.  This makes the individual stock method of investing more attractive, as it will require relatively fewer transactions.

Finally, when investing in a taxable account, owning individual stocks or low turnover ETFs allows the investor to tax-manage the account more effectively.

Shiller on Mutual Funds

In summary, I'll leave the last word to Robert J. Shiller, who noted in his prescient book Irrational Exuberance [p.202],

It is often said that people have learned about the importance of portfolio diversification and are using mutual funds to acheive this.  Given well-managed funds with low management fees, this argument makes some sense.  But many funds charge such high fees that investors might be better off trying to achieve diversification themselves, if diversification is the primary investment motive.  Moreover, when they are investing outside of a tax-free environment, by holding stocks directly investors can avoid capital gains taxes on the gains the mutual fund managers realize when they sell stocks in the funds' portfolios, an important issue with higher turnover funds.  Investors can instead realize, for tax purposes, the losses on the stocks that go down.  Mutual funds clearly have their limitations.

DISCLOSURE: Tom Konrad and his clients do not have positions in any of the securities mentioned here, although they do have positions in many of the stocks owned by these funds.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 06:00 PM | Permalink

Shares of Calpine Corp. (CPN) suffered a greater than 20% loss yesterday and is now down almost another 13% today. All of this was caused by a court ruling stating that they will be unable to use the $395 million in cash they received from the sale of oil and gas fields earlier this year for the purpose of buying natural gas to run its power plants.

The dispute stems from the Bank of New York's decision in September when, acting as trustee for Calpine bondholders, it withheld proceeds from Calpine's sale in July of North American oil and gas fields.

The bank froze the money after the bondholders said money from the sale couldn't be used to buy fuel futures but should be used instead to buy other assets or pay off debt.

The move prompted Calpine to file a lawsuit against the Bank of New York and Wilmington Trust Co. seeking release of the funds, arguing that buying natural gas in storage is allowed under the terms of its notes. [ more ]

When I purchased this stock for the mutual fund I mentioned it was a very speculative play.

Shares in FPL and Calpine Purchased August 15
Calpine Corp. (CPN) is the other utility that I started a position in today. This one is a more aggressive play, but has the potential to generate better results. Calpine supplies electricity from natural gas-fired and geothermal power plants to wholesale and industrial customers in North America. This company has had some serious financial difficulties in the past and is trying to right itself. This is a very speculative purchase and I did not commit very much money into it. I purchased this stock with an average entry price of $3.35 for the mutual fund only.

With the stock now sitting at a dollar and change the big question is should I sell now? As I stated above I didn't purchase a large amount of the stock, so this loser doesn't seriously affect the portfolio. If they would have gotten a positive ruling then the small amount of stock would have seen some good gains. It was a gamble and one that is lost. There are now fears that bankruptcy is just a couple of quarters away. I'm going to sit with my shares for now since it is sitting at the 52 week lows. I will continue to watch this stock to see if they can get an appeal, but the hopes are fading quickly. The company still has a book value of over $6, so it could see itself purchased by a larger company in the future. So I will hold for now.

This is also just another reminder that many of the stocks in the Alternative Energy sector are very small companies. Many are on the verge of breaking out big over the next couple of years, but there are also many that can blow up in your face. So as they say, make sure all your money is not in one basket.

Posted by Mark Anderson at 02:59 PM | Permalink | Comments (0)

ENDESA (ELE) reported a 52 percent increase in third-quarter profit Wednesday and said it will distribute almost 2.12 billion euros ($2.48 million) in dividends for the year. The company said it will pay out nearly 2 euros ($2.34) a share in dividends for 2005. [ more ]

The increased dividend is an attempt to ward off a hostile takeover attempt by Gas Natural. The stock way paying an almost 4% dividend yield and this move takes the divendend up near 12% with the special payout.

Today I purchased the second third of my planned holdings for ELE in the mutual fund.

Posted by Mark Anderson at 01:20 PM | Permalink | Comments (0)

I purchased shares of Mechanical Technology Inc (MKTY) and Medis Technologies Ltd. (MDTL) this morning for the mutual fund and also my personal portfolio.

Both of these companies are working on the miniaturization of liquid fuel cells so that they can power portable electronic equipment like cell phones and laptop computers. Both companies have also secured contracts from the military to research portable fuel cells for military applications. Both companies announced earnings recently and still show no signs of becoming profitable in the near future. However, they have both made progress on trimming their losses. I feel that one of these companies will strike it big in the future so I’m buying both and hedging my bet. Both of these stocks will not see substantial gains until they start producing equipment that makes it out of the beta stage in the next few years.

Both companies are starting to trade at the lower end of their recent trading ranges and are entering the lower risk entry point.

Medis should be a good buy at this price level since it is now sitting on some firm support.

Mechanical Tech is currently sitting on some light support at the $3 level but could trade lower from here down to the $2.50 level and I would buy more that that point.

I purchased a 1/3 holding in each for the mutual fund and a full holding for my personal portfolio.

MDTL was purchased at an average price of $14.93
MKTY was purchased at an average price of $3.04

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 10:25 AM | Permalink | Comments (0)

Shares of Capstone Turbine Corp (CPTC) are rising sharply this morning with high volume and gapped up with a gain of over 35% this morning. There is currently no news to cause this increase today and I will be digging deeper to find out what is going on. This is good news for the stock and also the portfolio. My holdings are now up over 50% in about 10 days.

If you were thinking of buying the stock now, you should wait till some news confirms this move.

Update at 12:15 EST: The only news I can find on the this move is from the Yahoo message boards and an expected announcement of Wall Mart working with United Technologies to supply the PureComfort CHP system for a store in Colorado. The UTX system utilizes the Capstone microturbine. I place zero reliance on message board posts and feel that this news is not the reason. I will keep digging.

Update at 1:25 EST: The Wall Mart story has been confirmed. At least the rumour of a potential big purchase by Wall Mart story has been confirmed. Well even message board posters can get it right sometimes.

Shares of Capstone Turbine Corp (CPTC) , a maker of microturbine generators powered by natural gas, jumped 36 percent on Tuesday on a television report that Wal-Mart Stores Inc. will place a big order for the company's machines. [ more ]

Update at 5:30 EST I should have known this was a Jim Cramer induced rally. He was the one that floated the Wall Mart rumor last night on his TV show. I don't watch him and don't like his hype. The hype is great for traders because it create volatility. So I fully expect this stock to settle back down over the coming weeks as large owners take profits. If you don't have a position in the stock and want to own it for the long term, I would wait and buy below the $3.00 level. I do believe in this company and I have no plans to sell my holdings, I just would not be a buyer at this price level.

Posted by Mark Anderson at 09:51 AM | Permalink | Comments (0)

I purchased shares in
Altair Nanomaterials (ALTI) this morning for both my personal portfolio and also the mutual fund. ALTI is a holding company that specializes in nanomaterials and also contains a life sciences division. The materials company has research in high performance batteries, fuel cells, and photovoltaics.

Altair announced earnings today and the stock is up on the morning trading.

Revenue Increases 68 Percent for Third Quarter and 230 Percent for Nine-Month Period
"An increase in revenue of 230 percent for the first three quarters of 2005 is representative of the significant progress Altair has made over the last nine months," said Altair Nanotechnologies Chief Executive Officer and President Alan J. Gotcher, Ph.D. "We are experiencing solid business development progress and opportunities in both our Performance Material and Life Sciences divisions in several target markets. We expect these opportunities to mature and to produce recurring and sustainable revenues." [ more ]

Today they reported a net loss of $0.04 which is compared to a net loss of $0.03 for the comparable quarter. The increase in this loss is attributed to an increase in investments for new contract R&D projects. The company has been performing well and the number of these new R&D contracts has been increasing.

• Congress to Fund $2.5 Million in Energy and Water Development Appropriations for Altair Nanotechnologies' Nanoscience Research
• Altair Nanotechnologies, University of Nevada Research Foundation and Alternative Energy Consortium Receive $2.5 Million Grant From U.S. Department of Energy

I started a 1/3 position in ALTI today with an average purchase price of $2.54.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 10:52 AM | Permalink | Comments (0)

I placed several trades for the mutual fund this afternoon to start building a position in some of the fuel cell companies. This sub-sector has been under pressure the last couple of months but seems to be building a nice base of support at the current levels. I feel this entire sub-sector is ready for a nice up move and the stocks have been behaving nicely the last week or so. The one stock I seriously considered not adding was Quantum. The stock has been in a steady decline and there is no sign that it’s going to slow down. I'm betting that the general area of support for all the companies in this sub-sector will help to provide some support to this stock. There are also some smaller stocks in this sub-sector that I'm watching as well and may add them soon.

I took a 1/3 position in the following companies for the mutual fund portfolio.
Ballard Power (BLDP) at the average price of $5.03
Fuelcell Energy Inc (FCEL) at the average price of $9.13
Millennium Cell Inc (MCEL) at the average price of $1.63
Plug Power Inc (PLUG) at the average price of $5.91
Quantum Fuel Systems Technologies Worldwide Inc (QTWW) at the average price of $2.72

I also took a position in Millennium Cell Inc (MCEL) as well in my personal portfolio.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 02:47 PM | Permalink | Comments (0)

This morning I purchased shares of Capstone Turbine Corp (CPTC) in both my personal portfolio and the mutual fund. I have been waiting for the stock to show some strength after its recent declines. The stock appears to have some nice support at the $2.25 level as a bottom. They will be announcing quarterly earnings on November 10th.

Capstone Turbine developments and manufactures microturbine generators. The company’s microturbines can also be used as generators for hybrid electric vehicle applications. It also offers Model C60 integrated combined heat and power systems (CHP). A one third stake have been purchased at an average price of $2.75.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 10:31 AM | Permalink | Comments (0)

Scottish Power plc (SPI) is an electrical generation and distribution company primarily focused in the UK. They have two subsidiaries that are based in the US, PacificCorp and PPM Energy. They are currently in the process of trying to sell PacificCorp to Berkshire Hathaway.

PPM Energy is a company with extensive wind energy development and generation. Scottish Power also has extensive wind farms in Scotland and Europe. They are also developing off-shore wind power of the Welsh coast.

This stock has been moving strong recently and it looks like it is building a base at the $40 level. I purchased a 1/3 stake of this stock for the mutual fund at a price of $27.00. I will purchase additional thirds on any pull backs to lower my cost basis. This stock also pays a 4% dividend.

ENDESA (ELE) generates and distributes energy in Spain, Italy, France, and Portugal, and Latin America. They have extensive wind farms in Spain. They are currently trying to fight a hostile bid by one of its competitors Gas Energy. The stock currently pays a 3.5% dividend. Endesa has forumulated a plan to increase the dividend payouts to 7 Billion Euros over the next 5 years to combat the hostile bid. They will accomplish this by disposing of non-strategic assets to generate the future dividend payouts. Full details about their plans can be found on the Endesa website [ pdf ].

The stock has been moving strong over the last month and I have been waiting for a pull back to enter the stock. That pull back has never materialized and I wanted to step into this position before it gets away from me. I'm purchasing a 1/3 stake in the mutual fund at $40.91. I will purchase remaining thirds on any pullbacks from here.

With these purchases I'm now at a 50% invested position in the mutual fund. My plans are to still try to maintain a conservative stock entry strategy as I get closer to 100% invested in the mutual fund. I'm already at an 80% invested amount in my personal portfolio. I will be selling some of my stake in PBW to gain cash as I find new names I want to own in my personal portfolio.

Posted by Mark Anderson at 09:50 AM | Permalink | Comments (0)

The fears of Rita have fallen away and the market is finally moving to the upside again this morning. I have been watching IdaTech (IDA) for purchase for a couple of weeks and I had previously mentioned I have been looking for a good entry point on this stock.

IDAcorp is an Idaho power utility with electrical generation using Hydro, Natural Gas, and Coal. They also own IDATech which manufactures fuel cell solutions. I'm waiting on this one until the technical picture of the chart improves. I would be a buyer if we can either get a retest of the recent $29 support level or a break out to the upside above $33.

I may be jumping the gun on this one in anticipation of a bounce from here so I determined to purchase a starting position. I determined a fixed amount of money of the mutual fund I would be willing to invest in this name. I then decided I will take 1/3 of that total and invest it at this point. Shares of IDA were purchased at a price of $30.11.

IDA is a solid company with good financials and also pays a 4% dividend. I feel that this is one of the safer investments in this sector. The 3 year chart shown below shows a nice uptrend for the last 3 years and it is currently sitting at the lower end of the upward trading channel.

I also purchased some additional shares of Calpine Corp. (CPN) today for the mutual fund and also opened a position in my personal portfolio at a price of $2.61. I used a similar 1/3 approach for Calpine when I made my first purchase. This is my second third of the total amount I'm willing to invest in this name. This brings my average cost down to $2.98 for CPN in the mutual fund. This is still a very risky investment and you should use caution with this one.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 10:32 AM | Permalink | Comments (0)

I currently don't have time to do a complete writeup on this stock, but wanted to let everyone know that I purchased shares in Active Power Inc (ACPW) this afternoon for both my personal portfolio and the mutual fund. The average price was at $3.77. I will updated this post later this afternoon with more details.

---

Updated at 10:00 PM

As I mentioned above I purchased shares in Active Power Inc (ACPW) this afternoon for both the mutual fund and my personal portfolio. Active Power designs and sells battery-free uninterruptible power supply (UPS) systems. They accomplish this through the use of flywheel technology and they have also developed their CoolAir^TM DC: Thermal and Compressed-Air Storage (TACAS) technology that uses compressed air and heat to provide clean power backup.

Last week the stock made a bullish technical signal with a golden cross using the 50/200 day moving averages. The stock is currently sitting at some support at the $3.50 level and the potential downside could be all the way down to $2.50 by looking at the technical picture. As a long term purchase, I would be willing to buy all the way down to the $2.50 level. My gut is telling me that we will not see anything below $3 for sometime.

However, keep in mind this is a speculative purchase. The company is still not profitable and analyst estimates are not seeing profit opportunities for 2006 either. There is also nobody willing to float an estimate for profits looking out 5 years. The key driver for future growth in this company are more contracts and running the company efficently.

There is plenty of interest in the company and I see positive signs in the company and also the potential for a higher stock price in the future.

On the plus side, there is a history of steady buying of the stock by the Chairman, Mr. Pinkerton. The number of shares short have been steadily declining. They have been making postivie progress on the revenue estimates and also reporting better than expect losses for the most recent quarter. Finally, they have also been securing some large orders recently that have helped the stock on its recent up move.

Active Power Ships Continuous Power System for Use at Chinese National Olympics
announced the shipment of a continuous power system to China for use at the country's National Olympics being held in Nanjing in October. The system integrates an Active Power CleanSource® flywheel UPS, diesel engine generator and transfer switch, all enclosed in a standardized mobile container that allows it to operate in harsh outdoor environments. Control software is also included that allows the user to remotely monitor all aspects of the power system at one central location. [ more ]

Active Power Receives 5.4 MVA UPS Order; Largest Megawatt-Class UPS Order to Date
announced receipt of a new order from Caterpillar Inc. for four 1200 kVA flywheel uninterruptible power supply ("UPS") systems and two 300 kVA UPS systems. The units will be used to protect the state-of-the- art high speed printing operation of a large communications company in the Southeast United States. Shipment is expected to take place within the next two quarters. [ more ]

As I look at this trading for this stock today, I ended up purchasing it at the high of the day and will look for an opportunity in the near future to average down to a better price point for the mutual fund. My plans for my personal portfolio is to let it stand as is.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 01:37 PM | Permalink | Comments (1)

This morning I purchased shares for the mutual fund in two large utility companies that both have extensive research and power generation via renewable energy.

FPL Group Inc (FPL) is an electric utility that is primarily based in the South East. This company owns Florida Power and Light and has been in much of the recent news due to hurricane Katrina. FPL also owns FPL Energy which is a division that provides wholesale electric power that is generated from Natural Gas, Wind, Solar, Hydro, and Nuclear. They currently produce more Wind generated power than any company in the US and they also own two of the largest solar fields in the world. This stock also pays a 3% dividend and I feel is one of the more conservative investments. I wanted to get some money into this name as soon as possible so I purchased shares in this company this morning for the mutual fund with an average purchase price of $45.98. I plan on averaging down my cost basis over time since it is at the high end of its trading range currently. I will be buying more once it comes back down to its 50 day moving average (currently at $43.)

Calpine Corp. (CPN) is the other utility that I started a position in today. This one is a more aggressive play, but has the potential to generate better results. Calpine supplies electricity from natural gas-fired and geothermal power plants to wholesale and industrial customers in North America. This company has had some serious financial difficulties in the past and is trying to right itself. This is a very speculative purchase and I did not commit very much money into it. I purchased this stock with an average entry price of $3.35 for the mutual fund only.

Other utility companies that I'm also looking at are IDAcorp (IDA) and Endesa SA (ELE). Both of these companies are very stable and also pay decent dividends. I will be adding these two stocks to the portfolio eventually, just not now.

IDAcorp is an Idaho power utility with electrical generation using Hydro, Natural Gas, and Coal. They also own IDATech which manufactures fuel cell solutions. I'm waiting on this one until the technical picture of the chart improves. I would be a buyer if we can either get a retest of the recent $29 support level or a break out to the upside above $33.

Endesa (ELE) is a Spanish electric utility with an extensive footprint in Europe and Latin America. They are also heavily involved in Wind power generation. They were recently part of some intense hostile takeover interest earlier this month and the stock has actually soared. I'm waiting to see if the stock can hold these new highs or come back to the mean before I purchase these shares.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 10:40 AM | Permalink | Comments (0)

Energy Conversion Devices Inc (ENER) opened up trading this morning with a gap down to the $33 level. For the last hour it has been steadily rising up from this point.

As I said in my earlier post, I have been looking for a good entry point in this company and feel that the near term support of $33 is an ideal area to place an order. The stock has been on a run for several months and it is always hard to take a new position in a stock that has already seen dramatic increases in a stock price. When this happens I have learned to look for short term pullbacks, or a retest of support lines to start new positions.

The fear (and potential downside) is that the support will not hold and you could be looking at a very big loss. This is where you need to look back at the fundamentals of the company. There is alot of good news about the future of this company, and the most recent earnings announcement points to several optimistic opportunities to look forward to.

"...Cobasys' success in winning purchase orders for its proprietary NiMH battery system solutions for the automotive markets is another big plus for our business," continued Stempel. "Cobasys' ongoing work in hybrid vehicle prototype development will hopefully lead to more opportunities down the road."

"ECD Ovonics is well positioned to capitalize upon the current government and consumer focus on new sources of energy," Stempel said. "We're extremely pleased with the pace of production and shipments at United Solar Ovonic. In the fourth quarter, we manufactured a record level 5.7MW of products with a sales value of $18 million and we're now running essentially at our rated production capacity of 25MW." [ more ]

I purchased shares this morning in both the mutual fund and my personal portfolio at an average price of $34.75.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 10:07 AM | Permalink

DayStar Technologies Inc (DSTI) has been on my radar for some time and the recent operational update created some renewed interest in the company. The stock traded up nicely over the past couple of days and it is now trading back down to the near term support due to some profit taking on the news. I have been looking for a good entry point on this stock and I feel like today is the day to make the move. Technically, the downside of this stock is that it may not be able to hold its currently levels and could be facing a sharp +30% decline below the $10 level. The cause for this type of decline would have me reevaluate my long term hold on this position.

Currently the company is trading at 5x book value and holds little debt. They are not close to showing a profit, but the prospects of California solar initiatives and the new energy bill are stirring some interest in this company. They are a growing company and plan on adding new manufacturing space and employees to keep up with the research and demand of their products and services.

Today I purchased shares in this company at an average price of $13.46 for both my personal portfolio and the mutual fund. I will continue to be a buyer of this stock below the $15 price level.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 12:42 PM | Permalink | Comments (0)

Hydrogenics Corp (HYGS) is a developer of fuel cell technology and hydrogen generation. They are also working with wind farm technology in the generation of hydrogen. Back in January of this year they successfully completed the purchase of Stuart Energy which compliments their product portfolio.

Shares of the stock have been under pressure for the last couple of months due to missed expectations on Q1 revenue results. There is also some major concern about an increase in product backlog.

In August, HYGS issued their most recent quarterly earnings and are attempting to reassure the shareholders that they are making great strides in incorporating the Stuart Energy division and also working on fulfilling the backlog of orders.

"We believe that the increase in revenues, combined with synergies derived from the Stuart Energy acquisition, will accelerate our path to profitability," continues Rivard. "All in all, we believe we are delivering on the commitment we made at the beginning of the year to achieve renewed financial performance for our shareholders by applying discipline and sound business fundamentals." [ more ]

I have successfully owned this name in the past with some nice gains in one of my trading portfolios. Right now I feel it is poised to move to the upside for a long term uptrend and I purchased shares in both my personal portfolio and my Marketocracy mutual fund portfolio at an average price of $4.00. The stock is currently sitting right against some resistance at the $4.00 and I think it has the momentum to take it out to the upside. The stock has some nice support at the $3.50 level and I would be willing to average back down if it comes back down to this price level.

There are also some other Marketocracy gurus adding this stock to thier portfolios as well, which may (or may not) be a good sign. [ more ]

For those of you that are adventurous, the HYGS MAR 2006 5 Calls look good here if you can get a fill in the $0.50-$0.60 range. There is very little open interest for options on this stock and getting a fill at a decent price may be difficult.

DISCLAIMER: I am not a registered investment advisor. The information and trades that I provide here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Mark Anderson at 12:10 PM | Permalink | Comments (0)

I finally got around to setting up a virtual mutual fund at Marketocracy.com. This virtual fund gives me 1 million in play money to prove my worth. If they like what they see, they will set up a real fund.

Just like every real mutual fund you need to setup an investment charter and style. They will report on performance once you have maintained the mutual fund compliance rules.

In a nutshell they are as follows:

• No position can exceed 25% of your total portfolio value.
• Half your portfolio must be comprised of positions under 10% each.
• Your cash position isn't limited by this guideline, although you must be 65% invested.
• No fund can hold more than 25% of invested assets in Exchange Traded Funds (ETFs) for a majority of the quarter.
• Once you setup an investment style, you can't drift into another style during any specific reporting period.

Once you have met these compliance rules, you will start to be eligible for tracking. The next quarter starts on October 1st. Since I want to run this portfolio like it was REAL money, I feel hard pressed to become within compliance in that short of a time. So I'm going to aim for full compliance starting on January 1st and I will have all of 2006 to prove myself and the value of this investment style.

The style I want to follow with this money is primarily conservative in nature with minimal trading. I plan on keeping a minimal cash position. The main difference and value added I think I can provide compared to the PBW ETF is that I can rotate holding percentages into the various sub-sectors (i.e. Fuel Cell, Solar, Wind, etc.) So if I feel that I will get more bang from my investment buck, I may sell some holdings in the Fuel Cell sector to add to the Solar as an example.

I will start to place my trades in the coming days and will detail each of the trades and why I like them here on the website. Some of these trades will overlap with the real trades I make with my real portfolio and I will detail the specifics here as well along with more details about this program.

As an aside, I tried to place a trade in LSGP when I purchased it in my portfolio. They would not allow a purchase of this stock since it trades so thinly. So some of these early stage development companies will not be included in the mutual fund holdings.

Posted by Mark Anderson at 01:54 PM | Permalink | Comments (0)

Investing in a portfolio of companies involved in alternative energies such as wind, solar, and hydrogen fuel cells has been challenging, but it is now getting easier. Last month saw the launch of the WilderHill Clean Energy Index (ECO), a benchmark comprised of publicly traded companies involved in alternative energies that is published by the American Stock Exchange. [ more ]

A listing of the index components for this ETF can be found at the AMEX website. This is great news and also a great way to invest in Alternative Energy Companies. I feel that ETF's are much more cost efficient and easier to use than mutual funds. This ETF is scheduled to launch in October and I will post the ETF ticker symbol when it starts trading.

Posted by Mark Anderson at 08:13 AM | Permalink | Comments (1)