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July 02, 2014

The Bull Market For Alternative Energy Funds Continues

By Harris Roen

Robust Alternative Energy Mutual Fund Returns

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Alternative energy mutual funds remain a strong investment sector, showing extremely robust returns in June. On average, MFs gained 28.1% for the year, and every fund posted double digit returns. Also without exception, all funds are up for the past three months.

More importantly, long-term returns for alternative energy mutual funds have greatly improved in the past year. In June 2013, the average three-year return was 3.0%, with three out of 10 funds showing losses.

Green ETFs Increase Gains

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Green ETFs have significantly increased their gains since May, up 37.6% on average for the year. This is substantial improvement compared to the 25.7% average annual gain a month ago.

There is only one fund showing a loss for the year, Market Vectors Rare Earth/Strategic Metals (REMX). Otherwise all ETs have returned near 20% or better for the year. The two solar ETFs, Guggenheim Solar (TAN) and Market Vectors Solar Energy ETF (KWT) show the greatest gains by far.


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

June 05, 2014

Alternative Energy Mutual Funds and ETFs Returns Flatten

By Harris Roen

Alternative Energy Mutual Fund Returns

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Alternative energy mutual funds have given back some of the gains they have enjoyed since the beginning of the year, though they are still up almost 20% on average. All MFs are in positive territory, with annual returns ranging from 9.8% to 40.9%. MFs are also up nicely for the week and month, but on average are down slightly in the past three months.

These returns are very different than those of just five months ago, when alternative energy MFs were doing almost twice as well… 

Alternative Energy ETF Returns

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Alternative energy Exchange Traded Funds are up 25.7% for the year on average, with all except one posting gains. Solar ETF Guggenheim Solar (TAN) has the greatest gains, up 63.1% in 12 months. Market Vectors Rare Earth/Strategic Metals (REMX) is still down for the year, off 20.1%.

Quarterly returns are much more mixed, with only 5 out of 17 ETFs up in the past three months. The largest three month loser is iPath Global Carbon ETN (GRN), down 27.9%.


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

May 20, 2014

The Very Quick Guide To A Green Portfolio

Tom Konrad CFA

For many, the decision to get out of fossil fuels is an easy one.  It may be because it's the right thing to do, or because we see the risks of investing in businesses built around an unsustainable economic paradigm.  This article is not about that decision; it's about what to do next.

The Green Portfolio: What And Why

To a lesser extent, it also depends on what we mean when we say "green."  For simplicity, this article will focus on making your portfolio Fossil Fuel Free (FFF), meaning that the portfolio should contain no companies involved in the extraction, refining, or power generation from coal, oil, natural gas, and (usually) nuclear power. 

Many investment professionals with the strongest green credentials consider FFF investing less than ideal.  Rafael Coven, Managing Director of The Cleantech Group, states that investing in the efficient use of fossil fuels is usually the most cost-effective way to reduce our reliance on them. Yet the FFF movement is not just about the most effective way to reduce fossil fuel use. It also seeks to send a message that our reliance on fossil fuels and their influence on our political system is unacceptable.

Whatever a green portfolio means to you, make sure that the person implementing your strategy understands. Jan Schalkwijk, CFA, a portfolio manager at JPS Global Investments in Portland, Oregon, says that if your advisor tries to talk you out of your chosen strategy, it is time to find a new advisor. One frequent argument is that it will increase risk or lower returns. Schalkwijk cites research demonstrating this need not be true.

The Green Portfolio: How

There are three ways to implement a green portfolio: Selecting individual stocks, selecting mutual funds or ETFs, or paying an advisor to select them for you.  Financial resources enable us to pay for advice, while time helps us find good advice or make good investment decisions on our own. 

Your financial resource is your whole portfolio, not just the portion currently invested in fossil fuels. Mutual fund and advisor fees are based on the size of your account, and determine how much advice you can buy.

Investing Efficiently

Taking energy use as a metaphor, buying stocks and bonds is like buying wind turbines and solar panels, except in investing, we pay taxes on our gains instead of receiving subsidies. As with energy use, it's almost always best to reduce our expenditure (costs) before we increase production (invest.)

The easiest way to reduce expenditure is pay down debt such as mortgage, car loans, and credit cards. Upgrading our homes for efficiency and (sometimes) solar can also help. There are few better investments for taxable savings (as opposed to retirement accounts like IRAs.)

Allocation

Building a portfolio starts with asset allocation.  An advisor will do this for you, or you can use an online asset allocation calculator like this one to find out how you should allocate you money between stocks, fixed income, and cash.

Funds

There are many green  mutual funds available, but few are completely fossil free; I focus on the latter simply to save space.  Exchange traded funds (ETFs) are usually a cheaper option, but broad-based fossil free ETFs are not yet available.

According to Garvin Jabusch, Founder and Chief Investment Officer of Green Alpha Advisors in Boulder Colorado, the only truly fossil free broad-based mutual funds he has been aware of are Shelton Green Alpha (NEXTX) and Portfolio 21 (PORTX).  Recently, PAX World and Green Century have begun dropping fossil fuel holdings from some of their funds as well. Most other green funds claiming to be fossil free simply avoid the 200 largest fossil fuel companies. This leaves thousands of smaller companies equally committed to fossil fuels.  NRDC and Blackrock recently announced new global equity indexes which will exclude fossil fuel companies, but we do not yet have details.

Unfortunately, few of these supply any allocation to fixed income.  The exception is the Green Century Balanced Fund (GCBLX), which provides a 19% allocation to fixed income.  The PAX World High Yield Bond (PAXHX) is a higher yielding but riskier fixed income option. Schalkwijk says a fossil free fixed income allocation could be met with a number of yield-focused equities (see below.)

Advisors

Many advisors will help you create a green portfolio, but most will do so using mutual funds. If they do, you will pay two layers of fees: One to the advisor, and one to the funds. The double layer of fees may be hidden with commission-based advisors who are paid by the funds, but it's still there. If you're willing to do the work, you will probably be better off creating your own mutual fund portfolio as I describe above. I know of three green investment advisors who create portfolios of individual securities for clients, avoiding this double layer of fees. Of these, only Tom Moser of High Impact Investments in Tuscon normally takes clients with less than $50,000 to invest. The others are Schalkwijk's JPS Global Investments and Jabusch's Green Alpha Advisors. 

The level of customization these advisors are willing to offer depends on how much you are willing to invest, but if you and your advisor are in tune as to what you mean by “green,” they may not consider it customization at all. When choosing advisors, it is also important to understand what your costs will be (both in terms of the advisor's fees and the costs of the investments they select), and the services they provide.  Each of the three above has a unique perspective on green. If any one is not right for you, he will likely help you find someone who is.

Stocks

For those with the time, inclination, and aptitude, a stock portfolio may be the lowest cost option. An often overlooked but very useful resource is the holdings of the fossil free mutual funds mentioned above. Other resources include my own writings and subscription services such as the Roen Financial Report.

On the income side of the picture, the Roen Report has just published a free report on green dividend investing. I am managing a fossil free equity income strategy with the income increased and risk reduced by option selling with Green Alpha Advisors.  We're currently only able to offer it in separate accounts of at least $100,000, but I frequently write about many of the holdings.


Your best investment options

How much you have to invest

Time you can spend

Less than $50,000

$50,000 to $100,000

Over $100,000

As little as possible

Funds

Funds

Advisor

A good chunk now, not much ongoing

Funds

Advisor

Advisor

A lot; I like thinking about this

Stocks

Advisor, Stocks

Advisor, Stocks

Summary

The easiest way to build a green portfolio is to work with an advisor who understands your goals and invests directly in green securities. A number of green mutual funds are also available to the small investor, but more risk-averse investors who need income have fewer options. Real world energy efficiency investments and paying down debt are the best green income investments.

DISCLOSURE: I receive compensation from both JPS Global Investments and Green Alpha Advisors for stock research and portfolio management services.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

May 03, 2014

Can Alternative Energy Mutual Funds and ETFs Continue to Beat the Market?

By Harris Roen

Alternative Energy Mutual Fund Returns

Alternative energy mutual funds have proven to be an excellent investment over the past year or more, but those gains have flattened out as of late. MFs are up 33% on average with even the lowest returning fund, Gabelli SRI Green AAA (SRIGX), up 15% for the year.
The alternative energy sector is by far beating the overall market. For comparison, as of April 21 the tech heavy NASDAQ was up around 27% for 12 months, the S&P 500 by 20%, and the Dow Jones Industrial Average only 13%

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Alternative Energy ETF Returns

Green ETFs are posting excellent gains overall for the past 12 months, up 51% on average. As with MFs, quarterly returns are relatively flat, with the exception of nice gains in First Trust ISE-Revere Natural Gas Index Fund (FCG) and iPath Global Carbon ETN (GRN).
An indication of how much the fortune of alternative energy ETFs have changed can be found by looking at long-term returns. Currently alternative energy ETFs are down 5.9% on average over a three-year time frame. Eight out of 14 funds, or a bit less than half, are trading down. Compare that with a year ago, when alternative energy ETFs were down 15.5% on average over a three-year time frame, with more than 70% of funds showing a loss. When looking at where annual returns were a year ago, about 40% of the alternative energy ETFs were down. On average the ETFs were flat for the year, as compared to the large one-year gains alternative energy ETFs are showing now…
ETF_20140321[1].jpg

DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

April 03, 2014

Strong Returns Continue for Alternative Energy Mutual Funds and ETFs

By Harris Roen

Alternative Energy Mutual Fund Returns

Alternative energy mutual funds have posted extremely strong returns across the board. Gains have shown a wide breadth, with all MFs up for the last 12-month and 3-month periods. In the past year, all funds are up double digits.

A new fund has been added to our tracking system, Calvert Green Bond A (CGAFX). This fund started trading in November 2013, and is the first green open end bond fund designed for retail investors. CGAFX focuses at least 80% of its assets on “…opportunities related to climate change and other environmental issues.”

Credit ratings for holdings in CGAFX are solid overall. Almost 70% are invested in either cash, U.S. Treasuries, or A rated bonds or better…

MF_20140321[1].jpg

Alternative Energy ETF Returns


ETF_20140321There are a wide range in returns for ETFs this month. On average the group is looking very strong, as returns and other measures have been improving.

The two purest solar funds, Guggenheim Solar (TAN) and Market Vectors Solar Energy ETF (KWT), show the strongest returns. Both have more than doubled in the past in the past year, and both are up by about a third in the past three months.

The two mining funds in this group, Global X Lithium ETF (LIT) and Market Vectors Rare Earth/Str Metals (REMX), are the poorest performers. REMX is down 23% for the year, and LIT is basically flat…

ETF_20140321[1].jpg

DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

February 07, 2014

As Goes January? What the Pullback in Green Mutual Funds Means

By Harris Roen

Alternative energy mutual funds and ETFs have pulled back from some of the fantastic gains seen in 2013. There is a saying in the investment world that “as goes January, so goes the year.” Is it time to bail on this sector, or on stocks in general? Perhaps, but wise long-term alternative energy investors should avoid rash steps at this juncture.

Alternative Energy Fund Returns

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Mutual Funds are down about 4% on average year-to-date, and are basically flat for the past three months. Despite this, alternative energy mutual funds are up 22.7% in the past year, and not a single fund is trading in the red.

By far the best performer in the past 12 months is Firsthand Alternative Energy (ALTEX), up 75% for the year. Most of the stocks the fund holds are in the high-flying solar sector, including SolarCity Corp (SCTY), SunPower Corporation (SPWR) and GT Advanced Technologies Inc (GTAT).

etf_20140205.jpg Exchange Traded Funds are only down 0.9% on average. If the outlier iPath Global Carbon ETN (GRN) is removed, however, then ETFs are down more like 1.6%. On the other hand, the 17 alternative energy ETFs posted a strong showing in the past year, up 34% on average. Not surprisingly, two solar ETFs have had the best one-year returns—Guggenheim Solar (TAN) and Market Vectors Solar Energy ETF (KWT).

The lowest performing funds on an annual basis are Global X Lithium ETF (LIT) and Market Vectors Rare Earth/Strategic Metals (REMX). These two funds reflect the dip in basic materials markets, which mostly reside in developing countries. Investors have soured on emerging markets of late, betting on lower growth in China. The logic goes that since China is the world’s manufacturer, and thus the largest market for these materials, a slump in China will cause a large economic drag for this sector.

Where We See Opportunity

One fund where we see opportunity is Allianz RCM Global Water (AWTAX), which has risen to a Rank 1. This environmental services fund has decent returns at relatively low risk. Its stock fundamentals are strong, and it has moderate management fees. AWTAX is trading fairly low relative to its annual price range, so this looks like a good entry point.

iPath Global Carbon ETN (GRN), which tracks the Barclays Global Carbon Index, has finally had a lift. Gains started occurring in April of 2013, then accelerated just after the new year. This reflects the fact that beleaguered carbon markets have been digging themselves out of a bottom. Despite these developments, it may be years before a viable carbon market reemerges.

As Goes January?

So let’s take a closer look at that saying “as goes January, so goes the year.” True, the S&P 500 is down over 5% for the year so far, which is spooking investors. A quick look at the facts, though, makes me think there is less reason to worry about than the slogan implies.

Looking at historical data for the S&P 500 back to 1950, there is a very high correlation of market direction for the month of January and the rest of the year. 70% of the time, if the market was up in January then it was up for that year, or if it was down in January it was down for the year. Of the 45 years that there was a correlation, however, 32 of them were in an up market, and only 13 had a down correlation. So the trend is much truer for an up January than a down January. Even more interesting, though, is that when the S&P 500 was down in January, it finished trading up for the year 16 times. In other words, a down January predicted an up year more times that it predicted a down year. Though past behavior does not always foretell the future, I would not be too worried about stock market losses in January predicting a down year for 2014.



DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

January 03, 2014

Alternative Energy Mutual Fund and ETF Year End Update

By Harris Roen

Alternative energy investing was very profitable in 2013. This article reviews how green mutual funds and ETFs performed in 2013, what stocks were most favored by these funds, and forecasts where funds should go in 2014 and beyond.

Alternative Energy Fund Returns

2013 has been the year of the comeback for alternative energy mutual funds and ETFs. As of close last week, green mutual funds are up 37% on average. Without exception, not one of the 13 mutual funds ended down for the year. ETFs did even better on average, up 43%, with 14 out of 17 funds posting gains for the year.

Alt E Mutual funds 2013

Contrast this with last year, when alternative energy mutual funds were up less than 10% for the year, with 2 out of 8 mutual funds closing down. Alternative energy ETFs fared even worse, down 3% in 2012. Half of the ETFs closed down in the red.

Alt E ETF 2013 Returns

2013 returns were best for funds heavily invested in solar stocks, including Firsthand Alternative Energy (ALTEX), Guggenheim Solar (TAN), Market Vectors Solar Energy ETF (KWT) and First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN). Many of the solar stocks in these funds were at or near their lows at the end of 2012, so their annual returns look very good. Still, the majority of those solar stocks are far below levels they were trading at several years ago. So for example, ALTEX is back up to where it was trading at in August 2011, but has far to go to reach its highs made 5 years ago.

Mutual Fund and ETF Stock Holdings

It is instructive to take a close look at the most popular securities that alternative mutual funds and ETFs are invested in. Of the green investments that the Roen Financial Report tracks, the most widely held by alternative energy mutual funds and ETFs is Johnson Controls (JCI). According to Morningstar®, JCI is owned by 13 green funds, making it a component of over 40% of all alternative energy mutual funds and ETFs. This blue-chip company is heavy into the building efficiency and power solution business, with the goal of having clients save on their energy bills while reducing their carbon footprint. For example, JCI helps clients achieve green building certification (such as LEED®) through demand-response systems and other efficiency measures. Though we feel JCI is above fair value in its current trading range in the low 50s, this is a solid company that professional fund investors consider a relatively safe and profitable green investment.

The other most widely held stocks are Itron (ITRI), SunPower (SPWR), Cree (CREE), SunEdison (SUNE), First Solar (FSLR) and SolarCity (SCTY). Of these, FSLR is the most heavily weighted stock by a wide margin. In other words, the quantity of FSLR stock that these funds hold makes up the highest percentage of any other single stock. In this case, FSLR makes up over 2% of all the combined portfolios of all 30alternative energy mutual funds and ETFs. The next highest weighted stock is SUNE at 1.7%. The rest of the stocks are around 1% or lower.

Annual sales for FSLR continue to climb, and earnings for this Arizona-based thin-cell solar company came in very strong for the most recent quarter. FSLR is a moneymaking pure-play company in the alternative energy investment world.

Looking Forward

We believe the recovery of alternative energy companies will continue into 2014. Alternative energy continues to enjoy a robustly growing share of the energy market, and there is little indication that his will change over the long-term. We project that these mutual funds and ETFs will maintain double-digit gains on average in 2014.

Another factor to consider is that when people continue to discover the price momentum green investments have seen in 2013, more and more investors will want to get into in these upward moving funds. On the down side, this type of momentum investing will likely cause much continued volatility in the alternative energy sector. The patient investor, however, is likely to be well rewarded by being in a high-quality alternative energy mutual fund or ETF.


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

November 23, 2013

Alternative Energy Funds In The Lead

By Harris Roen

Alternative energy MFs and ETFs posted record gains in the past 12 months. Guggenheim Solar (TAN) and Market Vectors Solar Energy (KWT) are the top two performers out of more than 1,500 ETFs. Firsthand Alternative Energy (ALTEX) and Guinness Atkinson Alternative Energy (GAAEX) are in the top ten for over 28,000 mutual funds.

MF_20131115

Mutual Funds

Returns overall have been spectacular for alternative energy MFs. Even the lowest performer is up 27% in the past 12 months. The best performers are those strongly invested in solar, specifically ALTEX and GAAEX, as the solar sector has been on an absolute tear. It should be noted, however, that some of these high fliers are still down from their highs of several years ago.

A new fund has been added to our ranking list, Green Century Balanced (GCBLX). It does not specifically invest in alternative energy companies, but instead has a broader green investment agenda. Its principal strategy is to invest in “environmentally responsible and sustainable U.S. companies, many of which also make positive environmental contributions.” There is a good Reuter’s article on GCBLX, recommending it for the fossil fuel divestment crowd. It comes onto the alternative energy mutual fund list as a Rank 2 (funds are ranked from 1 to 5, with 1 being the best).

ETF_20131115

Exchange Traded Funds

Returns for alternative energy ETFs have been strong, like their MF counterparts, though gains have been much more variable. TAN has returned an astounding 240% for the year, and Market Vectors Solar Energy (KWT) gained 185%.

Of the two funds, TAN is higher ranked due to several factors. TAN is a much larger ETF, managing over $400 million as compared to about $30 million invested by KWT. This makes TAN a more stable investment platform. Additionally, TAN has somewhat better fundamentals in its underlying assets when looking at price/sales and forward price/earnings ratios.

On the down side, three of the alternative energy ETFs show a loss for the year. iPath Global Carbon ETN (GRN) is down by more than half, reflecting the continued struggle in European carbon markets.


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of TSL. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

October 03, 2013

Alternative Energy Outperforms All Other Sectors in September

By Harris Roen

Alternative energy MFs racked up extremely robust gains in the past year. Returns range from a low of 16%, to a high of 64% for a mutual fund that is heavy into solar investments. ETFs also did well, but returns are much more variable. They range from a loss of 34% for a carbon ETF, to more than doubling of a solar ETF.

Mutual Funds

Returns remain excellent for alternative energy MFs overall, with average mutual fund up 32.3% for the year. Not a single fund posted a loss in the past 12 months. All mutual funds are also up for three-month and one-month time periods.

The best performing mutual fund over several time frames (12-month, three-month, one-month and one-week) is Guinness Atkinson Alternative Energy (GAAEX), up over 64% for the year. This fund is strongly invested in solar, with top weighted holdings that include SunPower Corp (SPWR), JA Solar (JASO), ReneSola (SOL) and other solar winners.

MF_20130930

Exchange Traded Funds

Performance of alternative energy ETFs are better for the year than their mutual fund counterparts, up 36.1% on average. There is a wider range of returns, though, with three out of the 17 ETFs posting double-digit losses.

The best returning ETF is Guggenheim Solar (TAN), up an astounding 113.5% for the year! Though this solar ETF is trading at its best levels in over a year and a half, it is still far below levels it was trading at in the heady solar days of 2008. This suggests that the climb for this fund could continue far past current levels.

ETF_20130930

Alternative Energy versus Other Sectors

Compared to other sectors of the economy, alternative energy mutual funds and ETFs have outperformed extremely well. According to Morningstar®, sectors on average returned 24%, far below annual returns for MFs and ETFs. It is interesting to note that alternative energy mutual funds and ETFs did much better than the volatile energy sector as a whole (four to five times better in fact).

sector_year

 
Monthly returns show even better comparative results. Alternative energy MFs and ETFs beat all the sectors without exception. Comparing the average of all sectors, mutual funds performed almost twice as well, and ETFs almost three times better.
 

sector_month

 
The easy money may have been made in September, led by extremely strong returns in solar. However, I still believe the mindful alternative energy investor is likely to do well in the long term.


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC owned or controlled shares of TSL. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

August 22, 2013

Alternative Energy Mutual Funds Post Stellar Performance, ETFs Variable

By Harris Roen

Mutual Funds

Alternative energy MFs have had stellar returns in the past three and 12 months, all showing gains in the double digits. ETFs have also done well on average, but returns are much more variable, as detailed below.

MF_20130820[1].jpg 

Returns remain excellent for alternative energy MFs overall, with annual returns ranging from 54.5% to 15.8%. The average MF is up 31.3% for the year, and not a single fund posted a loss in the past 12 months.

Three-month and one-month returns also look good—even the funds that did not make a gain are down less than 1%. One word of caution, though, is that all MFs are trading near the top of their 52 week range, which could mean a short-term pullback from here.

Exchange Traded Funds

Performance of alternative energy ETFs are much more erratic than their mutual fund counterparts. Overall ETFs have done well, 14 out of 17 ETFs show gains for the year, and two funds, First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN) and Market Vectors Global Alternative Energy ETF (GEX) posted gains better than 50%. Three funds, however, had losses for the year, with iPath Global Carbon ETN (GRN) down almost 50% in the past 12 months. This exchange traded note, which tracks Barclays Capital Global Carbon Index Total Return, continues to reflect the global paralysis in carbon markets.

ETF_20130820[1].jpg

Having said that, GRN is up 33.5% over the past three months, and is up 56% from its lows of mid-April. This improvement signals confidence that the European Union is having success in addressing long-term carbon market issues. The gain also reflects a positive reaction to new Chinese emissions trading initiatives aimed at aiding troubled carbon markets

Guggenheim Solar (TAN) has done extremely well, up 77% for the year, owing to a recovery in solar stocks  that started at the end of 2012. Recent news from the trusted industry research group IHS Electronics & Media Market Intelligence contends that the improved margins that photovoltaic companies reported in the second quarter of 2013 should continue to increase. I expect the solar sector to hold strong for the rest of 2013.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

July 23, 2013

Did You Just Buy a Sustainable Mutual Fund? No.

Garvin Jabusch

Did you just buy a sustainable mutual fund? No.

The answer is no because human economies are still so far from real sustainability that even a highly idealized portfolio of our most sustainable enterprises necessarily still falls short. Ultimately, the best any portfolio can do is mirror the reality of the world, and today, still, even the best representatives of sustainability can be found wanting compared to what will be required if we would like to keep society thriving indefinitely. At best, whatever fund you just bought can only be described as, to a greater or lesser degree, more sustainable than its non-green counterparts.

Not that we aren’t trying. We work hard to model what a truly sustainable economy - within which civilization could in theory thrive indefinitely - might look like, and then we endeavor to build portfolios of companies that appear to be working toward that world. Unfortunately, this is still anathema to most portfolio managers, who instead subscribe to traditional modern portfolio theory (which can require investing in things like fossil fuels), and even to many 'green' money managers who basically view their job as, for example, to remove Exxon from, and add a solar company to, a regulation S&P500 portfolio, but who are otherwise entirely shackled to traditional portfolio construction methods and who don’t seek portfolio innovation.

In a very real sense our economic theories and practices are far closer to imagining what it will take to keep economies growing and maintaining standards of living for a very long time given earth’s climate tolerances and resource limits, than they are to anything taught in traditional academies of finance. Yet, as far as I can tell, true indefinite sustainability is the only viable long term path for human economies, and therefore our methods of managing capital to be a conduit towards the sustainable world (such as via our mutual fund, NEXTX), represent the only course that provides hope for indefinite growth and also the most likely path for long term competitive investment returns. Because, as opposed to what? Crashing into resource limits? Asset management and capital markets are themselves in need of innovation to be effective conduits of capital facilitating the needed economic transformation.

So, to address the question most frequently asked of us: no, we do not practice negative screening to eliminate things we find to be less than sustainable so much as we apply a positive approach to proactively selecting businesses, techniques, technologies, and innovations that are leading the way toward true sustainability. Again, as a practical matter, since the world remains imperfect, we find that it is not yet possible to construct a broadly diversified portfolio that encompasses only perfect sustainability. So, in that sense, we are striving for a goal that is still impossible to realize from a practical perspective.

We believe, however, that in striving for this idealization we come closer, via our portfolios, to reflecting an economy that might be perpetuated indefinitely than do most other practitioners managing client assets. Pure theoreticians in academia or think tanks may say that our portfolios do not yet reflect perfect sustainability. True. We in turn say that that means human economies, although improving, are not yet capable of perfect sustainability. It is no accident that the list of people upon whose work we base our own theories and philosophies contains few, if any, other asset managers. The list of our guiding thinkers goes: Lester Brown, James Hansen, Joe Romm, Ramez Naam, Bill McKibben, and Elon Musk. Validation of the practical economics of our theses comes to us via Warren Buffett, Google, Goldman Sachs (believe it or not), and Elon Musk.

Daunting as it may be, striving for perfect sustainability is important. Because coming close to large-scale idealized sustainability is the only way our civilization can thrive going forward. So we are determined to keep reaching for practical realizations of this ideal, whether or not others agree with our vision, and whether or not some even believe in the science that to us so clearly demonstrates that present economies of non-sustainability can no longer serve our economic or societal advancement.

Strange as it may seem, there are still many in the investment industry, even among those who represent as “green” portfolio managers, who believe fossil fuels represent a resource that can somehow power civilization for the very long term. We believe in the polar opposite, as was well articulated in a recent Tweet from energy economist Gregor MacDonald: “Friendly reminder: we are in midst of a historic energy transition, away from liquid BTU to the power grid. Oil Age is in steep decline. Fact.”

We simply don’t see fossil fuels as primary power in an indefinite, growing economy, and we think the share prices of fossil fuels firms will, in relative terms, underperform over time as a result. Portfolio managers still clinging to fossil fuels as a source of low risk returns are, in practical terms, in terms of outcomes, no different than those who deny climate change in the first place. To thus simplify the narrative of energy as it is emerging now is to distort reality. We must ignore the rationalizations of these groups and instead hew close to our models of real, long term sustainability.

Ultimately the question becomes one of ‘do we think human society is something worth preserving or not?’ I understand that there are those (perhaps many in fact) who with no small hint of nihilism believe that humanity should just be allowed run its course and that in the end we deserve whatever we get, even if that means we don't go on for very many more decades or centuries. For us, until it can be demonstrated conclusively that society is well past the point of no return on the path to oblivion, we’ll continue to believe in and work with others to bring about a better world. Of course believing that this is the only long term economic path forward means we also believe we have every shot at very competitive investment returns along the way.

Remember, the two key transitions we need to achieve long term sustainability are (1) truly renewable energies and (2) close–to-perfect recycling or circular use of existing resources already in the human economy (waste-to-value economics). These two key disruptions to our current economic system serve the larger goal of getting more and more economic value out of less and less stuff, and less and less energy. Because it's in reaching the point where we have high standards of living without further degrading the ecological underpinnings of our existence that we see the ideal state of the next economy. This is what we strive for; this is what we envision as we select companies with which to build our portfolios.

Renewable energies and waste-to-value economics continue to advance against fierce resistance from human homeostasis, which, based in fear, latches onto the ways of the past in the hope that this somehow will hold the world together. As a result, because of this aspect of our basic nature, we’ll always face the risks of failure and collapse. Thus far, though (with some notable exceptions such as Easter Island), we’ve always managed to innovate ourselves out of trouble and into a better world.  This time will be no different. Yes, we’ll have to struggle to reach our ideals, but that’s what growth is.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha ® Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club’s green economics blog, "Green Alpha's Next Economy."

June 27, 2013

Outstanding Annual Returns for Alternative Energy Mutual Fund, ETF Returns Mixed

By Harris Roen

Mutual Funds

Annual returns for alternative energy MFs are excellent, up a very respectable 23% on average. Not a single MF is trading down over the past 12 months, with even the smallest gainer up over 14%. Three month returns are more variable, but are still up 4.5% on average.

MF_20130625[1].jpg

Shorter term returns have all turned negative, though they are in line with recent drops in the broader market. For example, both the Dow Jones Industrial Average and S&P 500 Index are down about 4% for the week, and around 3.5% for the month.

Quarterly returns are more variable. Nine out of 12, or three quarters of the funds, are in the up column, gaining 4.5% on average for the past three months.

Exchange Traded Funds

Returns are up for the average alternative energy ETF over the past one year and three month time periods, though they range widely. 14 out of the 17 ETFs are up for the year, and all of these gainers are posting double-digit returns. The average loser, however, is down almost 30%. Though ETFs on average were up over the past three months, seven out of 17 funds, or 40%, were closed down.

ETF_20130625[1].jpg

The largest annual gainer is First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN), up over 50% for the year. This index tracking fund contains a wide array of alternative energy companies, though it is heavier to solar and efficiency stocks. Both these alternative energy sectors have been favored by investors over the past year. Even though QCLN has seen about a 7% correction off its highs back in May, it is still well below the 16 to 18 price range it reached in 2010 and 2011.

The greatest annual loss is from iPath Global Carbon ETN (GRN), down 40% for the year. This exchange traded note reflects the global paralysis in carbon markets, as European financial problems continue to dog carbon trading efforts. Having said that, GRN is up 32.5% for the month, and around 50% from its lows of mid-April. These gains likely reflect a positive reaction to new Chinese emissions trading initiatives aimed at aiding troubled carbon markets.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

June 01, 2013

Alternative Energy Funds Post Solid Gains

By Harris Roen

Mutual Funds

Mutual fuds 6-13

Performance for MF’s have been outstanding, following a surge in solar stocks, energy efficiency companies, and other alternative energy sectors. Over the past 12-months the average alternative energy MF returned 30.3%, and not a single fund was down for the year. Three-month and one-month returns were similarly spectacular, gaining 10.5% and 7.3% respectively on average, also with no losers.

I expect this trend to continue, as many of these alternative energy sectors are bouncing back from the overly pessimistic levels of 2012.

Exchange Traded Funds

ETFs 6-13

Returns for ETFs have been more variable, ranging from a gain of 68.3% in one year for First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN), to a loss of 52% for iPath Global Carbon ETN (GRN). This loss for GRN is not surprising, since it is pegged to Barclays Capital Global Carbon Index. This index is trading at 10% of what it was five years ago.

On average, alternative energy ETFs have had respectable gains for the past one-month, three-months and 12-months. As with MFs, these gains reflect the solid returns and improving prospects seen in several of the alternative energy sectors.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

May 01, 2013

Alternative Energy Mutual Funds Outpace ETFs

By Harris Roen

Investors love Exchange Traded Funds (ETFs). They trade like stocks, and are an easy way to diversify within a certain sector. Over the past year, though, alternative energy investors would have been much better off putting their money in regular mutual funds. The results are detailed in the April edition of the Alternative Energy Mutual Funds & Exchange Traded Fund report.

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Performance for alternative energy mutual funds were very good for the past 12 months, averaging 11.7% for the eleven funds covered by the Roen Financial Report. In fact, eight out of 10 funds had double-digit gains for the year (there is no data for Brown Advisory Winslow Sustainability (BAWAX) since it only started trading in June 2012). Also, Most of the mutual funds are trading near the top of their annual price range.

Three month returns have also been respectable, with ten out of eleven funds posting annual increases (and Guinness Atkinson Alternative Energy (GAAEX) just showing a slight loss).

mf_return_20130426[1].jpg

Returns for ETFs were much more variable than MFs. One year returns ranged from a gain of 24.2% for Market Vectors Global Alternative Energy ETF (GEX), to a loss of 35.2% for iPath Global Carbon ETN (GRN). Of the 17 alternative energy ETFs that the Roen Financial Report covers, over half showed annual gains. On average, though, returns were basically flat for both 12 months and 3 months.

Despite this lackluster performance for ETFs, their prospects seem to be getting better. On a rolling average basis, one-year returns have improved for alternative energy ETFs. In March, for example, the average ETF lost 6.8%. Similarly, there were one-year losses for February, January and December 2012. In fact, December saw an average ETF loss of 15.1% over the course of a year. The Roen Financial Report will be watching this trend closely to see if alternative energy ETFs continue to improve.

Though this discrepancy between ETFs and mutual funds may vary over time, alternative energy investors are wise to look at the entire fund landscape when deciding where best to deploy their assets.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

March 16, 2013

Alt Energy Mutual Funds and ETFs Shine, But Risk Remains

By Harris Roen

Mutual Funds (MFs)

All of the alternative energy MFs were up handsomely in the past three months. The biggest gainer was Firsthand Alternative Energy (ALTEX), up 27.3% for the quarter, which also moved ahead in its ranking. Even the lowest three-month gainer, Brown Advisory Winslow Sustainability Fund (BAWAX), was up an impressive 9.2%.

Mutual fund returns

One-year returns were more variable, ranging from a gain of 18.0% for AWATX, to a loss of 11.7% for ALTEX. This has much to do with the solar holdings in these funds. For example, companies in ALTEX such as JA Solar (JASO), Yingli Green Energy (YGE) and JinkoSolar (JKS) have had outstanding quarterly returns, but are still down substantially for the year.

Exchange Traded Funds

The average three-month return remains high for alternative energy ETFs, at 13.6%. The notable exception is GRN, which has suffered from the steep drop in carbon prices. Two solar ETFs have done the best in the past three months, TAN and KWT. Both these funds, though, have taken a beating over the longer term, as can be seen in their one-year and three-year returns.

ETF Performance

PowerShares Global Wind Energy Portfolio (PWND) is no longer trading, and closed out at $6.23/share on February 26th. What happened was that the amount of assets under management were too low for the company to justify keeping the fund open. This is not an uncommon occurrence in the over-crowded ETF world. KWT, GRN and First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (GRID) are also on watch for having the potential to be shut down and liquidated. This is a good reminder that care should be taken, as many alternative energy investments can be highly speculative on both the upside and the downside.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

February 12, 2013

Alternative Energy Funds Deliver Stunning Quarterly Returns, But Beware the Risks

By Harris Roen

The Roen Financial Report closely covers the universe of almost 30 alternative energy Mutual Funds (MFs) and Exchange Traded Funds (ETFs). We use a proprietary ranking method to pick the best funds, looking at measures that include fees, risk, tax liability, and the financial health of individual holdings within each fund. Subscribers can see the complete list of funds, including rankings and technical breakdowns, in both Excel and PDF format by clicking here .

Mutual Funds

Alternative energy MFs showed improving ranks for this February update. In all, three funds were bumped up to a Rank 1: Allianz RCM Global Water A (AWTAX), Guinness Atkinson Alternative Energy (GAAEX) and Alger Green A (SPEGX). This coincides with the fact that the alternative energy MFs we cover have gained an impressive 14% on average in the past 3 months. Contrarily, one alternative energy MF declined to the bottom of the heap, becoming a Rank 5.

Feb_2013_MF_Returns[1].jpg

Quarterly returns have been spectacular for all of the MFs, ranging from a low of 8.8% all the way to a remarkable 25.2% for GAAEX. Many of the equities held in these funds hit bottom at the end of 2012, so these returns reflect the upward surge since that time. Because of these gains, it should be noted that 8 out of 11 MFs are at the top of the annual trading range. Therefore, I would not be surprised to see a modest pullback from here for many of these funds.


Exchange Traded Funds

All the Rank 1 ETFs retained their current top slots: Market Vectors Environmental Services (EVX), First Trust ISE Global Wind Energy Index Fund (FAN) and First Trust ISE-Revere Natural Gas Index Fund (FCG). In addition, PowerShares WilderHill Clean Energy Portfolio (PBW) increased from a Rank 5 to a Rank 3. It shows improved capital gains exposure, and a reduced turnover ratio.

As with MFs, three-month returns for alternative energy ETFs have been extremely impressive. ETFs have gained 12% on average, with Market Vectors Solar Energy (KWT) up over 38%! The one exception is iPath Global Carbon ETN (GRN), an Exchange Traded Note that tracks Barclays Capital Global Carbon Index. Unfortunately, GRN has lost over half its value in the past three months. This is due to the depressed carbon market, which has been trading at all time lows.

Feb_2013_ETF_Returns[1].jpg

It is important to note that a fund like GRN has the potential to close up shop and liquidate its assets, not an uncommon occurrence in the over-crowded ETF world. GRN has an extremely low amount of assets under management, less than $1 million. It also trades at low volumes. These are two warning signs that its underwriter may decide to pull the plug sooner than later.

As is true with many alternative energy equities these days, they can be highly speculative on both the upside and the downside. Consequently, alternative energy investments may only be appropriate for a small portion of an investors overall portfolio.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.


January 10, 2013

Top Alternative Energy Mutual Funds and ETFs for 2013

By Harris Roen

The Roen Financial Report closely covers the universe of almost 30 alternative energy Mutual Funds (MFs) and Exchange Traded Funds (ETFs). We use a proprietary ranking method to pick the best funds, looking at measures that include fees, risk, tax liability, and the financial health of individual holdings within each fund. In the latest round of rankings, all top rated funds retain their premier slots.
Subscribers can see the complete list of funds, including rankings and technical breakdowns, in both Excel and PDF format, by going to roenreport.com/mfsetfs.

Mutual Funds (MFs)

2012 Mutual fund returns

2012 was a good year for alternative energy mutual funds. On average all funds returned over 9% for the year, with over half the funds posting gains of 15% or better. The best performing funds were Allianz RCM Global Water (AWTAX) and Pax World Global Environmental Markets (PGRNX). Both had annual returns in the 20% range.

These two best performing funds for the year have also dropped one notch from their Rank 1 status (see rankings here). The fund that declined most in rank was Calvert Global Alternative Energy A (CGAEX), which now rests at a Rank 5. This drop is accredited to shortcomings in the mechanics of the fund, including its high expense ratio relative to the other alternative energy mutual funds, and a low “Alpha” (essentially a measure of the value a fund's manager brings to the portfolio).

It is interesting to note that the funds which performed the worst for the year overall, Guinness Atkinson Alternative Energy (GAAEX) and Firsthand Alternative Energy (ALTEX), also performed best in the past month. This goes to show that chasing performance, especially on mutual funds, is usually not the best way to pick an investment. A much better approach is to look at multiple criteria in order to determine the fund most likely to have good returns going forward.

I see good opportunity in putting fresh money in several funds at this time. Mutual funds that look attractive now are AWTAX, New Alternatives (NALFX), Portfolio 21 R (PORTX) and Alger Green A (SPEGX). These are all Rank 1 or Rank 2 mutual funds, and the average underlying security in the fund is considered to be trading at below fair value.

Exchange Traded Funds (ETFs)


ETF Returns 2012

Alternative energy ETFs did not fare as well as MFs in 2012. The average ETF lost 3% for the year, though the number of ETFs that were up for the year were the same as the number that showed losses. The average gainer was up 9%, and the average loser was down over 15%. This discrepancy between returns on MFs and ETFs shows that having a professional manager actively overseeing investment decisions in a fund can make a great difference in net long-term returns.

The ETF with the best annual return was First Trust NASDAQ® Clean Edge® Smart Grid Infrastructure Index Fund (GRID) which held four stocks that gained over 50% for the year: AZZ, Inc. (AZZ), Prysmian (PRYMF), Valmont Industries, Inc. (VMI), and MasTec, Inc. (MTZ). In fact, over half the shares that this ETF held had annual gains over 15%.

PowerShares WilderHill Progressive Energy Portfolio (PUW) got bumped up to a Rank 1 due to its many positives, including good returns at moderate risk (see heat map below). Investors should be aware, though, that PUW has a high potential capital gain exposure due to the increased value of its holdings. An ETF that looks good to me at current prices is Market Vectors Solar Energy ETF (KWT). It holds at Rank 2 ETF, and is considered undervalued.

The graph above shows ETFs sorted by annual return, from largest to smallest, illustrated by the dark blue bars. The light blue bars show three month returns, which in this case have almost no correlation to annual returns. In fact, as with the MFs above, the two worst 12 month performers, Guggenheim Solar (TAN) and KWT, posted the best three months performance.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.

Disclosure

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article, but it is possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

Remember to always consult with your investment professional before making important financial decisions.

January 06, 2013

A Clean Energy Inflection Point in 2013? The Best ETF to Play the Trend

Tom Konrad

In 2007, it seemed like clean energy was finally becoming mainstream.  Both candidates for the US Presidency accepted the need to act on global warming, even if they did not agree on the degree, and clean energy stocks were rising even faster than the broad stock market.

Then came the 2008 financial crisis, and many Americans discovered they had much more immediate worries than the slow but inexorable warming of the planet.  Fossil fuel interests and the politicians who benefited from their donations  played to the new mood by providing a worried populace with the excuse they wanted not to worry about the lumbering menace by denying it’s existence.

Always Darkest Before the Dawn

Fast forward to 2012.  Leading clean energy stock indices continued to decline while the broader market staged a recovery.  A solar company became the poster boy for why government should not meddle in the energy market (despite the reality that energy is the most-meddled-in sector of the entire economy.)  The Doha round of climate talks concluded with no progress, and only the possibility of more progress in the future.

I started writing this article on the last day of the Mayan Calendar, I recall that it always seems darkest before the dawn.  Contrarian investors also know this, and know that the best time to buy is when other investors are running in terror.  The fact that you are reading this article means that we survived the winter solstice and the end of the Mayan calender.  (Incidentally, the world also survived the much more momentous end of the entire Mayan civilization, a fact that seems lost in the apocalyptic kerfuffle.)

In this apparent darkness, my panel of green money managers finds reasons to hope for a much better 2013.  Here is what they have to say:

Garvin Jabusch: Climate Changes Get Noticed

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha PortfolioHe also authors the blog ”Green Alpha’s Next Economy.” 

Jabusch says,

[T]he green economy is finally showing signs of approaching a meaningful inflection
point into mainstream acceptance.

Sandy, in slamming into the geographical and symbolic hearts of finance and policy in this country has brought climate risks and costs into popular discussion, but even before that, there were indications of a cultural tipping point. PricewaterhouseCoopers, McKinsey, the World Bank, the National Academy, Berkshire Hathaway, the Center for American Progress and the Clinton Global Initiative (among many others) have all recently issued strongly worded statements and reports about looming climate risks and also opportunities to mitigate and adapt. This year saw polar ice and also snow reach an all time minimum, and the drought in America’s heartland has only worsened as we’ve headed into winter. For example, fully 100% of Kansas was this week named to be in at least “severe drought” stage.

All these things do not go unnoticed, and people understand the need for an economic transition to put society on a more sustainable footing more than they ever have, in spite of efforts from some quarters to convince them otherwise. Lester Brown and his team at Earth Policy Institute have we believe correctly identified the weakest link in global economics with respect to climate: food security. What this means is that there is no disambiguating the energy-water-food nexus if we want to have a thriving civilization going forward. An investment manager who works hard to identify and buy the best mitigation and adaptation solutions delivered by the smartest companies in the most profitable ways now has almost an embarrassment of options for his clients’ portfolios. A carefully selected
basket of companies across various green energy and green economy applications should have an excellent chance to provide competitive returns.

Rob Wilder: A Conservative Surprise

Dr. Rob Wilder is Index Committee Chair for WilderHill Clean Energy Index (ECO), the first to capture and track this sector.   ECO underlies the PowerShares WilderHill Clean Energy ETF (NYSE:PBW.)

Dr. Wilder thinks Jabusch could be right.  He says,

Perhaps what might truly surprise and impact clean energy stocks the most, could be Conservative Republicans beginning to embrace renewable energy. So that American patriotic, Renewable resources which give independence and free us from reliance on foreign oil, are seen as a good thing. Right now it’s this political opposition to U.S. technologies that could grow fast like American-made electric cars, solar homes and businesses, offshore wind, and energy efficiency etc has most held us back.

Break that logjam and huge progress could be unleashed. For conservatives to embrace green as good in itself, or appreciation for emerging forces like climate change and new polls showing Americans accept the science here, would be compelling because it’s such a surprise.

Jan Schalkwijk: A Year of Triage

Jan Schalkwijk, CFA is a portfolio manager with a focus on Green Economy investment strategies at JPS Global Investments in Portland, OR.

Schalkwijk takes a more nuanced view, but is still optimistic about the prospects of stronger green companies.  He predicts that 2013 will be “a year of triage,” by which he means “investors will become more discriminating in evaluating which companies are terminally ill and which have just caught the flew from exposure to their sickly brethren. … stocks with the prospect of earnings, healthy gross margins, and positive cash flow should do better than science project stocks with low quality fundamentals.”

He continues,

I think 2012 might have marked the beginning of a reversal of fortunes for some clean energy stocks and the beginning of the end for others. It is my prediction that this process of triage will build steam in 2013. If we look at how the performance of the Wilderhill Clean Energy ETF (PBW) and Market Vectors Global Alternative Energy ETF (NYSE:GEX) differed in 2012, we get a glimpse of what might lie ahead. The former fund, which has a seat for almost any publicly traded green stock, is down nearly 22% year-to-date, whereas the latter, which has size and liquidity requirements, is flat for the year. In 2011 the two funds moved down in tandem.

Schalkwijk’s ETF Pick

Schalkwijk thinks the best ETF to play the triage trend is  PowerShares Cleantech (NYSE:PZD).  He says, “Over the last 5 years, PZD has “only” lost 35% of its value vs. 85% for the WilderHill Clean Energy ETF (PBW). The Fund’s strengths are its inclusion of larger diversified industrials that are building a lot of the clean energy infrastructure (Schneider (PA:SU, OTC:SBGSF), Siemens (NYSE:SI), ABB Group (NYSE:ABB)) as well as its underweight to the more speculative corners of the cleantech and alternative energy space.”

Rafael Coven: In His Own Words

Rafael Coven is Managing Director at the Cleantech Group, and manager of the Cleantech index (^CTIUS) which underlies the Powershares Cleantech ETF (NYSE:PZD.)

Given Schalkwijk’s endorsement, it’s no surprise that he sees 2013 in a similar way.  While he picks stocks for longer than one year, he expects a “Greater focus on generating cash flow and ability to be profitable without relying on subsidies and government largess” in 2013.  He expects the overall number of cleantech companies to contract, “as the best ones continue to get snapped up by old-line industrial players that can buy cheaper than innovate.”

Conclusion

Even if politicians tackle US Fiscal Cliff and Europes ongoing woes do not lead to outright crisis, it’s almost certain that 2013 will not be a repeat of go-go years like 2006 and ’07.  Hence, while the optimists may be right that climate events will be noticed, perhaps even by conservative Republicans, even a more favorable political climate will continue to test companies’ financial strength and business models.

Hence, even a year of inflection will probably also be a year of triage.  If I had to pick an ETF to play the trend, I’d go with the one that discriminates between strong and weak cleantech companies: Coven’s PZD.

Disclosure: I have no position in the ETFs mentioned, and a long position in ABB.

This article was first published on the author's Forbes.com blog, Green Stocks on December 27th.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

December 06, 2012

Should “Green” Funds Invest in Fossil Fuels?

Marc Gunther

Do the mathBill McKibben’s groundbreaking Rolling Stone story (Global Warming’s Terrifying New Math) and 350.org’s “Do the Math” divestment campaign raise important and difficult questions about fossil fuels. One that is starting to roil the world of socially-responsibly investing is this: How should mutual funds that strive to be “green” or “sustainable” or “socially responsible” deal with the fossil fuel companies in their portfolios? Should they divest, as McKibben argues?

That was the topic of a column I wrote last week for the Guardian Sustainable Business, which generated some noteworthy responses. It’s part of the British newspaper The Guardian, which has one of the most popular English language media websites in the world. Here’s how the column begins:

“We’re going after the fossil fuel industry,” Bill McKibben tells about 1,800 cheering fans in a Washington, DC, theatre. “They’re trying to wreck the future, so we’re going after some of their money.”

Al Gore notwithstanding, McKibben – an author, academic and founder of the grassroots climate group 350.org – is America’s leading environmental activist. His 21-city Do The Math tour begins a campaign to persuade colleges, churches, foundations and governments to divest their holdings in coal, oil and natural gas companies.

“It does not make sense,” McKibben tells the Washington audience, “to invest my retirement money in a company whose business plan means that there won’t be an earth to retire on.”

He’s right about that, but the divestment campaign raises a thorny question: where can investors who worry about climate change put their money?

Divest for our Future, 350.org’s divestment website, recommends “environmentally and socially responsible funds“. The trouble is, the biggest and best-known mutual funds that call themselves environmentally and socially responsible also invest in fossil fuel companies. They evidently haven’t heard McKibben’s message.

Is this green?

The column–you can read the rest here–goes on to report that the Parnassus Equity Income Fund  holds about 14% of its assets in oil, natural gas companies and electric utilities that burn fossil fuels, that the TIAA-CREF Social Choice Equity Fund owns shares in dozens of oil and gas firms including Hess, Marathon and Sunoco, and a pair of shale gas giants, Devon Energy and Range Resources, that the Calvert Equity Portfolio  has about 10% of its portfolio in fossil fuels, including  Suncor, which says on its website that it was “the first company to develop the oil sands, creating an industry that is now a key contributor to Canada’s prosperity,” and that the Domini Social Equity Fund has, among its top 10 holdings, Apache Corp, an oil and gas exploration and production company.

Are you surprised to learn that these funds invest in oil and gas companies, including those in the Canadian Tar Sands? Perhaps naively, I was.

If you believe McKibben’s math, as I do — and it hasn’t been challenged by the fossil fuel industry–the idea of exploring for new oil and gas is folly. Using data from the Carbon Tracker Initiative, McKibben estimated that the earth could burn another 565 gigatons of carbon dioxide and stay below 2°C of warming. Fossil fuel corporations have 2,795 gigatons in their reported reserves – five times the safe amount. We don’t need any more.

My Guardian column–which is the first of a series that I’ll be doing for the newspaper–was intended to highlight the fact that SRI funds weren’t as clean and green as many probably believe them to be. It didn’t set out to answer the question in the headline: Where can investors who worry about climate change put their pension?

After the story ran, I heard from the managers of two socially-responsible funds that, as a matter of policy, work hard to stay away from fossil fuels.

Carsten Henningsen, chairman of Portfolio 21 Investments,  emailed me to say that his company for the most part avoids fossil fuel companies, including those that extract natural gas (but not those that burn it). Here’s the policy:

Portfolio 21 Investments does not invest in companies directly involved in the extraction and production of fossil fuels ?coal, oil, and natural gas.  Natural gas has a lower greenhouse gas (GHG) emissions profile than either oil or coal.  Despite natural gas’s lower GHG profile, it is a combustible mixture of hydrocarbon gases, formed primarily of methane.  Deposits are found at varying depths beneath the Earth’s crust, both onshore and offshore, requiring the use of both conventional and unconventional extraction methods.  Given the elevated environmental risks associated with extraction, Portfolio 21 Investments will not invest in extraction and production.  However, due to the current limitations of renewables (in terms of current capacity and financial attractiveness), and  the lower GHG profile of natural gas, Portfolio 21 Investments will invest in companies involved in the transmission and distribution of natural gas as well as in utilities that utilize natural gas as a fuel source.

I also heard from Leslie Samuelrich, senior vice president, Green Century Capital Management, a fund company that was started in 1991 by environmental groups. She writes:

Investors concerned about climate change should look to use their investments as a vehicle to address the problem.

That’s why Green Century offers a mutual fund, the Green Century Balanced Fund (GCBLX), that is fossil fuel-free.

The Balanced Fund is an actively managed fund that holds a mix of stocks and bonds that meet tested environmental criteria. The Fund does not invest in the exploration, drilling, refining or production of oil, gas or coal.  The Balanced Fund provides an opportunity to invest in sustainable companies and environmental innovators.  The Fund also seeks to provide competitive returns to its investors and has a four star overall rating from Morningstar.

I’m not offering investment advice here, of course, but I do think socially-conscious investors should look into their funds’ portfolios, which are made public twice a year. If you want your mutual fund to divest fossil fuel companies, let them know.

A final thought. I have a lot of respect for the people I know at Calvert and Domini (where I’ve been an investor). They both do lots of shareholder activism around environmental issues. Here, in full, is the thoughtful reply that I got from Domini’s Adam Kanzer when I asked him about this issue:

Of course we’re reconsidering our approach to fossil fuels. We would expect anyone who has taken a close look at the science to regularly reassess their exposure to fossil fuels. Bill McKibben is absolutely right to focus attention on fossil fuel investment, and I fear his math is correct. Personally, I think the Carbon Tracker report is one of the most important reports I’ve read in a long time. Investors – and society – ignore these facts at their peril.

The question for us is how we can be most effective in our role as investors. How can we adequately reflect both our shareholders’ desires and our own principles, and also have a positive impact on climate? These discussions are ongoing and will continue. We believe a range of strategies need to be brought to bear on the problem.  We currently exclude individual companies that, in our view, fail to responsibly address the key sustainability challenges they face. We exclude industries where we believe the core business model is inherently destructive, and incapable of reform.  Nuclear weapons are a good example. In the energy sector, we currently exclude coal, nuclear and the major integrated oil companies. With respect to coal, we also generally exclude coal-based utilities, railway companies that derive most of their revenue from transporting coal, and we have also excluded marine shipping companies for which transporting oil and coal is a substantial part of their business. We also seek to exclude companies that derive significant revenues from tar sands development.

Our funds’ energy exposure is currently tilted toward natural gas, which we continue to view as a ‘transitional’ fuel towards a renewable energy future. At least for the near term, the lower carbon intensity of natural gas is important (We are well aware of the current debate around fugitive methane emissions, and are tracking this closely). We recognize natural gas is a short-term solution.  However this approach appears to be yielding benefits.  The abundance of natural gas, for example, has reportedly driven down the price and production levels of coal. http://www.sfgate.com/business/article/Cheap-natural-gas-drives-down-coal-industry-3519986.php  A move away from fossil fuels can’t happen overnight, and it’s important to support “better” sources of energy even as we look to alternatives. We believe it is important to remain flexible, and to adjust our policies and priorities as new information comes in.

We have also actively engaged with natural gas companies in our portfolio about hydraulic fracturing, and are engaged in a number of climate change initiatives, including corporate engagement on sustainable forestry and coal financing.

One way of viewing social screening is that it is a way to make a statement and send a signal to the marketplace. So the question for us on screening out industries is: have we made a strong enough statement about an issue? With fossil fuels we have made a strong statement by excluding coal, coal-burning utilities and most large integrated oil companies.  What we are considering now is whether we need to make an even stronger statement by re-evaluating our position on natural gas.

It’d be interesting to see Domini or Calvert poll their investors on this topic: Would they be willing to accept lower returns, in the short run, in exchange for a portfolio free of fossil fuels? Would you?


Marc Gunther writer for Fortune, GreenBiz and Sustainable Business Forum co-chair, Fortune Brainstorm Green 2012 and a blogger at www.marcgunther.com.  His book, Suck It Up: How capturing carbon from the air can help solve the climate crisis, has been published as an Amazon Kindle Single. You can buy it here for $1.99.

July 18, 2012

An Actively Managed Green ETF: HECO

Tom Konrad CFA

heat pump
diagram
Deepwater Horizon Oil slick, as seen by NASA satellite, May 24, 2010

For a growing number of people, ecological responsibility means more than just recycling and changing our light bulbs.  Many have started to ask, “How much good does saving a few hundred gallons of gas with a hybrid car do, when the mutual funds in your 401k own companies that are allowing 6.6 million barrels of oil to spill into the Gulf of Mexico, or fund misinformation about climate change?”

For most, the answer is, “Not enough,”  and that conclusion has led to a growing interest in ecologically-oriented mutual funds and ETFs.

It’s not cheap being green

Unfortunately, the desire to do right for the environment has often been at odds with the need to see decent returns on many green investments.  Ecologically minded and socially responsible mutual funds, like the Calvert Equity Portfolio (CSIEX),  Portfolio 21 (PORTX) or the Gabelli Green Growth Fund (SRIGX) often charge relatively high management fees (1.2%, 1.45%, and 2%, respectively.)  Many investors may think these fees are worth it, since the returns of such funds have typically beaten the market over long (5 and 10 year) periods, despite the fees and more recent (three years or less) underperformance, especially considering the fact that most of these management fees were considerably higher in the early years when the funds were small.

Market research generally shows that ecological and socially responsible investing provides a long-term edge, which most assume is because the more ecologically and socially responsible companies operate with an awareness of environmental and social risks which can harm the bottom line.

The ETF option

If ecologically and socially responsible investing produces superior returns, only to have these returns eaten up by mutual fund fees, it makes sense to ask if the performance can be replicated in a cheaper ETF option.  Unfortunately, the only socially responsible ETFs which have been around longer than three years, the iShares KLD Select Social Index Fund (NYSE:KLD) and the iShares KLD 400 Social Index Fund (NYSE:DSI) have underperformed the S&P 500 and two of the three mutual funds mentioned above over the last five years.  The two ETFs don’t yet have ten year track records.

The lower five year performance of KLD and DSI occurred despite substantially lower expense ratios, at 0.50% for both, which should give them an edge over the mutual funds of between 3.5% and 7.7% over five years.

Is active management required?

Although the data is too sparse to reach a conclusion, the weaker performance of socially responsible ETFs may be a sign that in order to retain an edge in terms of returns, ecologically and socially responsible investing requires more active judgement than can be had in a passively managed index fund like KLD or DSI.  This makes a certain amount of sense, because judging a company’s sustainability is still far more of an art than a science.

An actively managed ecological ETF

Investors who want the relatively low fees of an ETF, along with ecologically and socially conscious active management now have an investment option.  In June, Huntington Asset Advisors launched the actively-managed Huntington EcoLogical Strategy ETF (NYSE:HECO.)  Fund expenses are capped at 0.95% and will fall if the fund is successful attracting assets.

As a recently launched fund, HECO does not have data on past performance, but I recently spoke to HECO’s lead manager, Brian Salerno CFA about HECO and his strategy, and also attained some past performance data.  Salerno is also an investment advisor, and has been managing portfolios using the same “Ecological” strategy he is using for HECO since 2008, based on Global Investment Performance Standards (GIPS®).  GIPS is not exactly comparable to the total return methodology used to create the past performance data of the mutual funds and ETFs, because it accounts for fund inflows and outflows differently, but for want of anything better, I compare his net-of fees performance for the last three years with the other funds I’ve mentioned in this article in the chart below:

Conclusion

As you can see from the chart, Salerno’s EcoLogical strategy falls at the lower end of the middle of the pack over the three years he’s been managing portfolios using it.  Unfortunately, the differences in performance measures and the short track record mean that I can only conclude that the EcoLogical strategy’s performance is in that “middle of the pack” range.

In short, it’s still too early to conclude if HECO’s active management will allow investors to capture the return advantage of ecological and socially responsible investing without it being all eaten up in high mutual fund fees.  In order to help you decide for yourself, I’ll take a deeper look into Salerno’s strategy in future articles.

Disclosure: No positions.

This article was first published on the author's Forbes.com blog, Green Stocks.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

April 21, 2011

Top Performing Clean Energy Funds in 2010

Tom Konrad CFA

When Bloomberg New Energy Finance (BNEF) released their clean energy league tables for 2010, the top of the list was my favorite exchange traded fund (ETF), the Powershares Cleantech Portfolio ETF (AMEX: PZD), with an annual return of 7.6%. Second place was the Winslow Green Growth (WGGFX) mutual fund (7.4% return), which is one of what I consider to be the three best clean energy mutual funds. But the one I consider to be the best, the Gabelli SRI Green Fund (SRIGX) was nowhere to be seen, despite the fact that it returned 12.1% in 2010. The third is the New Alternatives Fund (NALFX). (There's more about why I like these clean energy funds here.)

The discrepancy arises because BNEF and I track different lists (my clean enenrgy mutual fund list is here, and the ETF list is here.) My lists include only US-traded funds, while BNEF's is global. BNEF also restricts their list to funds that are at least 50% exposed to clean energy. According to a conversation I recently had with John Segrich, SRIGX's manager, he had mostly moved out of renewable energy companies last year because he was bearish on the sector. This turned out to be a wise move, since most clean energy companies had large losses in 2010, with the Wilderhill New Energy Global Innovation Index (NEX) falling by 14.6% in 2010.

Although still invested in clean energy, Segrich has been holding more resource plays, such as recycling companies, like Horsehead Holding Corp. (NASDAQ:ZINC) and Globe Specialty Metals (GSM), which provides silicon metal to the Photovoltaic and Aluminum industries.

Defining clean energy companies can be tricky, and most industry observers such as BNEF use lists of technologies. I prefer to focus on companies that stand to benefit from increasing resource scarcity and potential, while reducing both global warming and other forms of environmental degradation.

The lack of focus on pure clean energy helped both SRIGX and PZD in 2008. Rafeal Coven, the adviser to the underlying index for PZD, noted that the poor performance of most renewable energy stocks in 2010 was a major reason why Cleantech Index-based funds (such as PZD) significantly outperformed their peers.

Will that trend repeat in 2011? Time will tell, but it pays to understand that the differences between clean energy sectors are often greater than their similarities. In 2010, often overlooked energy efficiency stocks returned 19%, outshining solar stocks (-25%) and blowing away wind stocks (-37%.)

When choosing the best clean energy mutual funds and ETFs, I've long used a a large exposure to energy efficiency as one of the most important criteria. When doing a home energy upgrade, the rule is to “Eat your Energy Efficiency vegetables before indulging in a solar power dessert.” The same rule applies when building a clean energy portfolio.

This article was first published on Tom Konrad's Green Stocks blog at Forbes.com.

DISCLOSURE: No positions.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

March 05, 2011

Choosing The Right Clean Energy Mutual Fund or ETF

Tom Konrad CFA

If you want to invest in renewable energy and energy efficiency with just one fund, this is what you need to know.

Over the last few months, I've written an extended series of articles looking at clean energy mutual funds and clean energy exchange traded funds (ETFs)

Defining Clean Energy

For my purposes, a clean energy fund is one that primarily invests in companies involved in renewable energy, energy efficiency and conservation, efficient and alternative fuel vehicles, and companies that are part of the supply chain for any of the above sectors.   

Many of the mutual funds I looked at also invest in environmental services/waste management, recycling, water, and natural gas utilities. Waste management, recycling, and water each fit rather well into the clean energy context: Municipal solid waste is an excellent source of renewable biomass, recycling saves energy and so can be seen as an energy conservation measure, and water is inextricably linked to energy in many ways.  Some would argue that natural gas (because it burns cleaner than other fossil fuels) and nuclear power (because it produces few greenhouse gas emissions) should also be included as clean energy.  I don't generally consider either clean, because the extraction of both natural gas and uranium can (and often does) cause great harm to the environment, while the storage of nuclear waste and the occasional nuclear accident also pose serious environmental threats.  If you disagree with me about natural gas, you're in luck, since some of the mutual funds I looked at include natural gas companies in their portfolios.  If you disagree about nuclear power, you might consider taking this article with a grain of salt, or perhaps adding a nuclear ETF such as the Market Vectors Nuclear Energy ETF (NLR) or the iShares S&P Global Nuclear Energy Index (NUCL) to the stock or mutual fund pick that you arrive at after reading this article.

Previous Articles

This article is intended to condense the information from my previous series in a useful fashion. Readers who want to see my reasoning or more depth can find it in the original articles, listed here:
  1. Costs of Clean Energy Mutual Funds
  2. Sector Breakdown of Clean Energy Mutual Funds
  3. Past Performance of Clean Energy Mutual Funds
  4. Stock Picks from Clean Energy Mutual Funds
  5. The Effectiveness of Active Management in Clean Energy
  6. Interview with the Manager of the Top Performing Clean Energy Mutual Fund
  7. Clean Energy ETFs in Depth
  8. Clean Energy Mutual Fund and ETF Tax Efficiency
How To Choose

The major factors to consider when selecting a clean energy fund are
  • Which fund is likely to produce the best performance?
  • Given my intended holding period and investment size, how much will the costs reduce the fund's performance?
Performance

In terms of the best performance, I found the data convincing that good active managers can produce superior results (see article #5.)  The best performing fund by far was the Gabelli SRI Green Fund class AAA (SRIGX)

For those of you who are convinced by statistical analysis, one of my more mathematically sophisticated readers, Tucker Gilman at RainFrog Ethical Investment Partnership, did a non-parametric statistical analysis of the thirteen clean energy mutual funds and ETFs with three years of performance data I mentioned in article #5.  Here is a graphical representation of his results:

Nonparametric analysis of fund performance
The horizontal axis is time (in trading days), while the vertical axis is fund performance.  The fact that the red line (which is SRIGX) is above the gray area means that we can be 95% confident in a statistical sense that SRIGX's past out-performance is not do to just luck, and we should instead take it to be an indication of manager skill.  For funds inside the gray area, we can't say with any statistical certainty that their performance arises from luck or skill.

I generally take statistical analysis with a healthy dose of skepticism, even when the methods in question seem sound to me (as they did in this case.)  Statistical analysis can tell us what has already happened, but unless we know why it happened, we can't know if the performance will persist.  In order to get a better idea how he achieved these results, I interviewed SRIGX's lead manager, John Segrich CFA.  Here is what he said about his stock selection process:
We start with the industry and attempt to understand the entire value chain. ... Through this process we look for areas of constraint in the value chain as investing in those often is quite profitable due to better pricing, margins, and profits. We then establish where we want to have exposure on a global basis – maybe we want exposure to the Chinese wind market but not the European market. After that, stock selection comes down to fundamental analysis and valuation. We also try to incorporate issues such as regulation, currencies, and other macro issues like credit availability.
This is a description of solid analysis, with the attention to detail that can give a manager an advantage in any sector where there are not too many others doing the same sort of analysis-- Or at least not too many others who are better at it.  As more and better managers enter and become familiar with the sector, Segrich's team's advantage is likely to erode, although not completely and probably over a period of years.  As the fund grows, it will also be less able to quickly enter and exit positions, so a larger fund size may also weaken their advantage.

For an investor who wants a clean energy fund, and who agrees that a superior manager has the opportunity in this young and frequently misunderstood sector to produce superior results, the Gabelli SRI Green Fund is the clear choice based on a track record that is much better than any other fund.  This choice should be re-assessed after two to three years, or if SRIGX hires new managers.  But don't dump the fund just because of one year of under-performance: Although manager skill can make a real difference, there is always considerable luck involved in investing. 

Investment Costs

When I wrote most of these articles, I thought that the expense ratio of SRIGX was the highest of all the funds I considered.  This was due to a mistake on my part when I did not look at the prospectus for the fund's class AAA shares (which are no-load), but instead looked at the multiclass prospectus, and so confused the load class A shares with the no-load class AAA shares.  This goes to show that you should not base any investment decision solely on what you read in an investment blog, even this one.  It never hurts to do your own research.

At 2.01%, SRIGX's annual expense ratio is high when compared to most mutual funds, but in-line when compared to other no-load funds in the category.  A self-directed investor should only consider buying the class AAA shares, SRIGX, which are available through most mutual fund supermarket platforms (I checked three online brokers.  SRIGX was available through Charles Schwab and E*Trade, but not through Interactive Brokers.) 

High expense ratios among clean energy mutual funds are in large part due to low assets under management.  The largest funds charge the lowest expenses.   Assets under management are rising rapidly at SRIGX as new investors and advisers take note of the Gabelli fund's excellent track record.  Based on the third quarter numbers for the Gabelli Green fund I used in November, they reported only $12 million in assets under management.  The more recent year-end numbers show assets under management at $20.8 million, a 73% growth in three months.  Higher assets under management will allow the fund managers to spread their costs over more investors, so if this growth continues, we can expect the Gabelli fund to lower their expense ratio to something more in line with the larger clean energy funds in coming years.

ETFs

Many investors will find a 2.01% expense ratio hard to stomach.  For them, ETFs are the best choice.  Among the ETFs, most have comparable expense ratios of around 0.6-0.7%, but when you consider other costs such as liquidity, internal trading costs, and tax efficiency, the Powershares Wilderhill Clean Energy Index (PBW) stands out as the lowest cost for short term (less than 1 year) investors because of its high liquidity.  For longer holding periods, my top choice is probably the Powershares Cleantech Portfolio (PZD), because it has what I consider to be the best allocation between clean energy sectors as well as global diversification. 

My preference for PZD may strike some readers as ironic, as I recently took Rafael Coven, the index manager behind PZD, to task for saying that the better tax efficiency of clean energy ETFs when compared to clean energy mutual funds is "very significant."  Rafael's job is to manage a cleantech index, not to investigate the subtleties of ETF and mutual fund costs.  As far as I can tell, his index is the best currently tracked by an ETF.  The other indexes typically have much higher turnover ratios, and high turnover ratios undermine the cost advantage of clean energy ETFs.

The Clean Energy Fund For You

To make it as simple as possible, here is a table that should cover most investors decisions on what to buy:

If you...
Then buy
Are buying for less than 90 days or plan to trade actively
PBW
Want to make small, monthly investments or are buying longer term
SRIGX
Plan to hold long term and refuse to pay a 2% expense ratio or don't think managerial skill is likely to persist PZD

Still not sure which is the best choice for you?  Leave a comment, describing why you don't fit into the categories of investors above, and I'll try to create a category and fund pick for you.

DISCLOSURE: No Positions. 

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.

January 13, 2011

Renewable Energy and Cleantech Mutual Funds and ETFs: Does Tax Efficiency Matter?

Alternative Energy and Climate Change Mutual Funds, Part VI

Tom Konrad CFA

My recent article, In Clean Energy, Active Management Pays, started a bit of a controversy.  Rafael Coven, the Index Manager for The Cleantech Index (^CTIUS), which is the index behind the Powershares Cleantech Portfolio (PZD), left a comment on Barrons and sent me an email saying, "Your comparison of funds and ETFs ignores the tax efficiency differences which are very significant."

Rafael is right that it's important for many investors to consider taxes before making an investment decision, and that ETFs are often more tax efficient than mutual funds.  But are the differences in the particular case of clean energy funds really "very significant"?  I had my doubts, so I decided to look at the numbers and find out.

Why ETFs are Usually More Tax Efficient

ETFs are generally considered more tax efficient because they make fewer capital gains distributions.  A mutual fund or ETF that sells a position at a profit is required by law to return a prorata share of any net capital gains to the fund's investors every year.  Positions held less than a year produce short term capital gains, while positions held more than a year produce long term capital gains.  When these gains are returned to investors, they are taxable as short or long term capital gains, regardless of whether the funds are reinvested.

In general, actively managed mutual funds trade much more often than ETFs, which passively track an index.  While many mutual funds trade much of their portfolio once or more a year, most ETFs only trade a tiny fraction of their portfolio in order to keep up with changes in the underlying index. 

Hence a mutual fund with a Turnover Ratio of 100% (meaning that, on average, 100% of the funds holdings are traded each year) will, on average, only hold a position for a year, and will distribute the majority of capital gains to shareholders every year, much of which will be in the form of short term capital gains, which are typically taxed at a higher rate than long term capital gains.   In contrast, an ETF with a Turnover Ratio of 10% will, on average, hold a position for ten years.  This allows time for significant undistributed capital gains to build up, and when those capital gains are distributed, they almost always come in the form of long term capital gains, which are usually taxed at a lower rate.

Who Needs to Worry About Tax Efficiency, and Who Doesn't

Not all investors need be concerned about the tax efficiency.   Most obviously, investors who are investing in a non-taxable account, such as an IRA and a 401(k).  Tax exempt institutions, such as charities, also need not worry about tax efficiency.  Finally, people in lower tax brackets need be less concerned than those with high incomes, since the taxes on capital gains distributions will be lower for them.

Undistributed Gains

Most renewable energy stocks are down significantly over the last three years (roughly the same period as the track record of most of the ETFs.)  This means that, at least in the short term, many mutual funds and ETFs will not have any capital gains distributions no matter how well they perform, because previous year's capital losses will be available to offset future gains.  (While funds are required to distribute realized capital gains, they have no way of distributing realized capital losses, except for offsetting future gains.) 

The Numbers

Morningstar has data on most fund's tax efficiency, including adjusted returns assuming distributions are taxable, and potential capital gains exposure (undistributed capital gains as a percentage of net assets.)  The following two tables and charts compare the ETF and mutual fund three year returns on both tax adjusted and unadjusted basis, along with potential capital gains exposure and fund turnovers.  Where possible, I used no-load mutual fund shares because I feel they are more comparable to ETFs than load shares, despite the fact that long term mutual fund buyers should generally prefer load shares because of their lower annual expense ratios.

ETF 3yr pretax
total return
3yr tax adj
total return
Potential Cap
Gains Exposure
Turnover
QCLN -43.34% -43.34% -52% 40%
PZD -28.31% -28.38% -40% 31%
PBD -56.22% -56.28% -98% 62%
GEX -64.96% -65.03% -198% 50%
PBW -59.90% -59.90% -234% 42%
ICLN insufficient track record
-64%


Mutual Fund
3yr pretax
total return
3yr tax adj
total return
Potential Cap
Gains Exposure
Turnover
WGGFX -38.09% -38.76% -46% 93%
NALFX -36.19% -39.81% -25.00% 34%
CGACX -61.73% -61.73% -110% 61%
AECOX -48.72% -51.72% -68% 39%
GAAEX
-66.23%
-67.52%
-241%
47%
WRMSX -42.70% -42.88% -260% 114%
SRICX 15.43% 12.65% 0.60% 190%
ALTEX -33.01% -33.01% -22.18% 41%

etf tax chart.png
mutual fund tax chart.png

As you can see from the tables, the ETFs have indeed been more tax-efficient than the mutual funds, but the differences are so marginal that they are difficult to detect in the charts. 

More striking are the extremely large negative capital gains exposures of many mutual funds and ETFs.  The DWS Climate Change Fund (WRMSX), Guinness Atkinson Alternative Energy Fund (GAAEX), Van Eck Global Alternative Energy Fund (GEX), and the PowerShares Clean Energy (PBW) all have undistributed capital losses equal to multiples of the funds' current values (260%, 241%, 234%, and 198%).  That means that all the holdings in each fund's portfolio could be sold for three or more times their current value and the funds would still not have to distribute any capital gains.   Tax efficiency will remain a moot point for years to come, at least for these four funds, as well as for the PowerShares Global Clean Energy Portfolio (PBD) and the Calvert Global Alternative Energy Fund (CGACX).

The only fund for which I can really call tax efficiency a concern is the Gabelli SRI Green Fund (SRICX).  Why does the Gabelli fund stand out as having a "problem" with tax efficiency?  Because the Gabelli fund actually managed to turn a decent profit over the last three years, while their clean energy mutual fund and especially ETF rivals lost money hand over fist.  I recently interviewed John Segrich, CFA, the lead fund manager at the Gabelli SRI Green fund, and he explained in part how they did it.

When it's a sign you're making money, tax inefficiency seems like a good "problem" to have. 

Turnover

It's also worth noting the fairly high Turnover ratios of all of the ETFs, ranging from 30% to over 60%.  That means that, on average, the holdings of Clean energy ETFs trade once every 2-3 years, which is not enough time to build up substantial unrealized capital gains, although the majority of capital gains distributions are likely to be in the form of long term capital gains.  In fact, the New Alternatives FD Inc (NALFX) has a lower turnover ratio than all but one of the clean energy ETFs.

Even when we return to an environment where most of these funds are habitually making gains, and the negative capital gains exposures of many of the funds are exhausted, these ETFs will have less of an advantage in tax efficiency over the clean energy mutual funds than broad market ETFs have over their peers, unless the ETF turnover ratios fall faster than those of the mutual funds. 

Conclusion

While Clean Energy ETFs are a little bit more tax efficient than Clean Energy Mutual Funds, the difference is not currently significant.  Clean Energy is a very young sector with high volatility and quickly changing industry structure.  The changeable nature of the clean energy landscape means that a lot of the usual rules do not apply.  Not only do active managers have a significant advantage over passively managed funds like ETFs, but passive clean energy funds also have much less significant tax advantages than passive broad market funds.
 
DISCLOSURE: No Positions. GAAEX is an advertiser on 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.

December 11, 2010

The Best Clean and Renewable Energy ETFs

Tom Konrad CFA

For short term holders, the Powershares Wilderhill Clean Energy ETF (PBW) is the best


If cost is the most important factor, an individual investor without the time or expertise to build a clean energy stock portfolio should choose one of the clean energy Exchange Traded Funds (ETFs)

I recently reversed my former stance, and now believe that cost should not be the only factor, because the evidence suggests that, in clean energy at least, the active management available from a mutual fund or an advisor who works with individual stocks can consistently outperform the passive approach used by the ETFs. 

That said, there is a strong case for keeping costs low.  In fact, most investors in clean energy do prefer the ETFs to mutual funds, despite ETFs' poor track records.  The total amount of money invested in general clean energy sector ETFs is over $1.1 billion, while the total invested in clean energy mutual funds is only $900 million, and the ETF total does not include the thirteen sub-sector ETFs listed below.

For readers who find the relatively short record of superior performance by clean energy mutual funds unconvincing, here is a comparison of the available Clean Energy ETFs.

The Funds

There are currently five ETFs addressing the broad alternative energy sector, as well as a few sub-sector ETFs, addressing Solar (KWT and TAN), Wind (PWND and FAN), nuclear (NLR,NUCL), Carbon (GRN), forestry (WOOD and CUT), the Electric Grid (GRID), and mining firms important to alternative energy (LIT,REMX,URA.)  I plan to discuss these sub-sector ETFs in future articles.  For now, I will focus on the general clean energy sector ETFs.  They are: Diversification

While the indexes the funds track sound fairly similar, there are some salient differences.  I think they can be best summarized as "Clean Energy" (most funds) vs. "cleantech" (PZD), and domestic (PBW and QCLN) vs. global (ICLN,PBD,PZD, and GEX.)  For most investors, the reason to buy an ETF instead of common stocks is to achieve quick and easy diversification at relatively low cost.  Hence, most investors should prefer the global ETFs to the domestic ETFs.  Since cleantech is a broader sector which includes clean energy, an investor seeking diversification may also prefer PZD to the other global ETFs because of the broader diversification, but this comes at a price of diluting exposure to the energy sector.

Size and Liquidity

Clean Energy ETF Assets and Daily $ VolumeThe chart to the right summarizes the assets held and the daily turnover (in dollars) of each ETF.  Large investors, and investors expecting to trade frequently using market orders should care about trading volume, which is a measure of the ETFs liquidity.

Market orders to buy or sell an ETF with high trading volume will generally be executed closer to the quoted price than orders to buy or sell an ETF with low trading volume.  Traders using limit orders or placing trades equal to a small fraction of an ETF's daily volume can expect to have minimal price impact, and so are likely to be less concerned about fund liquidity. 

The ETF with by far the best liquidity is the oldest of the ETFs, PowerShares' PBW.  Among the global clean energy funds providing somewhat better diversification, the most liquid is Van Eck's GEX.

Fund Costs

Investors in ETFs can expect to bear several costs.  First, they pay a management fee, which is publicly disclosed as the expense ratio.  They also pay a commission to buy the ETF, and liquidity costs from any price impact of their trade.  Finally, they pay the internal trading costs of the fund, which occur when index components or weightings change over time, and is captured in the ETF's Turnover Ratio (see the discussion of Turnover for mutual funds.)  Since it's typically cheaper to trade domestic stocks than international stocks, the domestic ETFs probably pay lower trading costs than global ETFs given the same turnover.

In the chart below, I've attempted to estimate the annual costs associated with buying $1000 of each ETF and holding it for one year and for five years. My estimates for liquidity costs and the internal Trading costs of the ETF are both very rough.

The costs for broker commission and liquidity are both one-time transaction costs, and will decrease for longer holding periods or increase for shorter holding periods than the five years I assumed.  When estimating a fund's internal trading costs, I assumed that larger funds would have higher internal liquidity costs because of larger transaction sizes, and also that domestic ETFs had lower trading costs than global ETFs.  My estimates for both liquidity costs and the funds' internal trading costs are very rough, and could be off by as much as a factor of 2 or 3 since I have limited information to go on. My estimates are shown in the graphs below.
,
Estimated ETF costs

Estimated ETF costs

As you can see, short holding periods favor the the PowerShares Clean Energy (PBW) ETF because of its greater liquidity.  However, the flip side of having better liquidity is a large funds size, which in turn leads to higher internal trading costs.  For longer term investors, the ETF's expense ratios and internal trading costs become much more important.  For a five year holding period, the iShares S&P Global Clean Energy Index ETF (ICLN) is the clear winner.  ICLN not only has the lowest Expense and Turnover Ratios, it also has a small fund size.  Although the small fund size leads to lower liquidity and higher costs for investors trading in and out of the fund, it also means that the fund's internal trading costs will be lower because smaller trades usually have lower market price impact.

However, the differences between ETF costs are less striking than their similarities.  Other than avoiding the PowerShares Global Clean Energy Portfolio (PBD), which has relatively high costs under both scenarios, the fund choice should probably be based on other factors.

Sector Allocation

As I discussed in my look at the sector allocation of Alternative Energy Mutual Funds, I believe investors will do best with a relatively low allocation to solar PV stocks, and a high allocation to energy efficiency stocks.  I also like investments in Alternative Transportation, the Electric Grid, Biomass, Geothermal, and Hydro, although these sectors are relatively small parts of all the portfolios.  Finally, since we are looking for an allocation to clean energy, a low allocation to "Other" which represents companies and parts of companies with operations that are not related to clean energy should be as small as possible.

Below is my analysis of the sector allocation of the ETFs, based on the complete lists of fund holdings from the fund sponsor websites:

 ETF Sectors
First Trust NASDAQ Clean Edge US Liquid (QCLN) has the highest allocation to energy efficiency, while Powershares Cleantech Portfolio (PZD) has the lowest allocation to solar.  Of the six, the inexpensive iShares S&P Global Clean Energy Index ETF (ICLN) fares worst, with no allocation to energy efficiency and a large allocation to solar.  Although ICLN has relatively good exposure to Hydropower and Biomass, this is not nearly enough to make up for the lack of any energy efficiency companies in the portfolio.  PBD, GEX, and ICLN do the best at minimizing allocation to non-clean energy sectors.

Value

Renewable energy is generally considered a growth sector.  After all, it's relatively new, and growing from a very small base as a percentage of our energy mix.  But that does not mean that there are no value stocks in renewable energy.  Over longer time periods, value stocks have consistently outperformed growth stocks in the broad market, and I see no reason to believe that they will not continue to do so.  Hence I prefer ETFs which put more emphasis on value stocks.

ETFs disclose the average Price/Earnings (P/E) and Price/Book (P/B) ratios of their portfolio holdings, and I've compiled them in the following chart:
P/E and P/B ratios of ETF portfolios
With P/E ratios of 17 and above, none of these ETFs can be said to be truly value-oriented, but there is a significant difference between different funds.  The best two in terms of value are PowerShares Clean Energy (PBW) and PowerShares Global Clean Energy Portfolio (PBD).  The worst (most growth-oriented) is the Van Eck Global Alternative Energy Fund (GEX).

Summary

The following table summarizes the above discussion, grading each fund on diversification, cost, allocation, and value, using a scale from 1 to 3, 3 being best.

Fund
Diversification
Cost
Allocation
Value
QCLN
1
2
3
2
PZD
3
2
2
2
PBD
2
1
2
3
GEX
2
2
3
1
PBW
1
3
2
3
ICLN
2
3
1
2

No ETF is clearly better than the others in all circumstances.  The one you choose should depend on your priorities.  If you are a trader and plan to hold the position for less than a year, PBW serves your needs best.  If you are a long term investors, PZD probably has the best balance of allocation to promising sectors and low cost.  However, if you are a long term investor more interested in Renewable Energy than Energy Efficiency and Cleantech, the best choice is probably ICLN.

My previous surveys of ETFs were less comprehensive, and focused only on Expense Ratio and sector allocation.  Further, I have not previously included the less energy-focused PZD in the list of ETFs I analyzed.   If you own ICLN or GEX because of one of my previous articles, I don't think it makes sense now to switch; all of these ETFs become cheaper over long holding periods.  Instead, you can lower your average cost over time and improve your allocation to the best clean energy sectors by using subsequent investments to buy individual stocks in sectors such as energy efficiency, while the ETF can continue to serve your diversification needs.  You may refer to my recent article selecting stocks from the portfolios of the clean energy mutual funds for a few suggestions organized by clean energy sector.

Conclusion

For traders speculating on short term gains in Clean Energy, the Powershares Wilderhill Clean Energy ETF (PBW) is the best vehicle due to its high liquidity.

For longer term investors, ETFs are my third choice as a method for investing in Clean Energy, after individual stock portfolios and actively managed mutual funds.  Mutual funds may cost more, but provide as much or more diversification and have performed better (even after the higher costs) for as long as most Clean Energy ETFs have been in existence.  For investors with the time or an advisor willing and able to work with individual stocks, stock portfolios offer both lower costs and the potential for better performance through better sector allocation and active management.

DISCLOSURE: No Positions. 

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.

December 05, 2010

How the Gabelli Green Growth Fund Got Its Five Stars

Tom Konrad, CFA

An interview with John Segrich, CFA, portfolio manager at the the Gabelli Green Growth Fund (SRIGX).

When I did my recent past performance comparison of clean energy mutual funds, I found that the Gabelli Green Growth Fund (SRIGX and SRICX) beat all its rivals by a long shot over the last three years, earning a coveted five-star rating from Morningstar.  In general, I'm a skeptic about short-term past performance: If you look at enough funds, sooner or later you'll find one that has had great performance by sheer luck.  Even when a few years' out performance is not luck, it may be the result of a fortuitous alignment: the fund's strategy could be particularly suited to recent market conditions.  When those conditions change, so will fund performance.

Nevertheless, I do believe that some managers can consistently beat index funds, especially in an emerging and little-understood sector like clean energy.  I manage clean energy portfolios myself, and if I didn't think that I could do better than indexing, I'd just buy an ETF, and spend the rest of my time more productively by taking up calligraphy. 

Unless you're reading this article in elegant script on a rice paper scroll, you can assume that I have not taken up calligraphy.  I believe some portfolio managers can consistently beat the market. 

How can we tell which money mangers are skillful, and which ones are just lucky?   The only way I know is to understand their investing process.  Which is why I asked John Segrich, CFA, the lead manager for the top-performing Gabelli Green Growth Fund, to submit to an interview.  In our interview, I try to understand his investing process, and if he has been benefiting from a temporary alignment of the (Morning)stars, or if there is some lasting advantage that future investors in his fund can take advantage of.

Our interview follows:

TK: Please tell us a little about your background and why you manage a sustainable mutual fund.

JS: While in college I interned at Gabelli & Company and upon graduating was offered a position as a full time analyst. I spent the next two years looking at emerging internet companies while at Gabelli. I then spent another two years on the buyside as a technology analyst. I moved to London with Goldman Sachs in 2000 and headed up their European Internet and then software research teams for a few years. I remained in London with JP Morgan as the head of their European sell side technology research team. In 2008, I moved back to New York and back to Gabelli & Company to head up their green research efforts. The firm then refocused an existing SRI mutual fund on sustainability in 2009. I also manage a hedge fund with a similar sustainability strategy.

The reason for my interest in managing a fund focused on sustainability is two-fold. First, I believe that by managing a portfolio of investments focused on sustainability, I can have a positive impact on the world with regard to these pressing issues. Secondly, we believe that by investing in these companies, we can achieve superior returns in the long run.

TK: Who are your investing role models?

JS: Mario Gabelli, our Chief Investment Officer, has been and remains my mentor over the years. His approach to investing is rooted in deep, fundamental research and in understanding the entire value chain on a global basis. He taught me to dig deeply into the numbers, read the footnotes, and ask the tough questions. He also is able to take a longer term view of companies and industries, and look through the short term fluctuations to identify value.

George Soros, a fellow philosophy major, also influenced my investment process through some of his writings, in particular in identifying the perception gap within an investment and understanding how the closing of this gap creates value.

I also admire some of the more visible hedge fund managers such as David Einhorn at Greenlight Capital or Bill Ackman at Pershing Square who relentlessly pursued their investment views even when the whole market was telling them they were wrong. They performed their own analysis and were firm in their conclusions despite the market telling them otherwise. Too often there is not enough analysis and many investors just take management’s view as the truth without testing those assumptions. The assumptions need to always be tested.

TK: What factors do you consider when deciding if a company is sustainable?

JS: Sustainability for us is to understand the impacts, opportunities, constraints, and issues that emerge as the world population grows from 6.8bn people. If we take that lens, and overlay it on any traditional sector, it helps us identify where we should look to find investment opportunities.

The starting point for us is to understand the industry on a global basis, analyze supply and demand, and then determine if the economics “make sense.” Can the companies and the industry survive on its own, or do they depend on the handouts of governments? If the industries are subsidy driven, we tend to look for wider margins of safety when investing and may be shorter term investors. If the industry is “sustainable”, then we can invest in solid business models for the long run.

TK: Do you believe sustainability confers a long term advantage to companies?

JS: By definition yes, since companies that do not embrace or understand sustainability issues that impact their business will likely not survive. In addition, we believe that the companies we are investing in are exposed to higher growth drivers due to their focusing on solving sustainability issues and therefore likely offer better investment opportunities combined with secular growth themes than those that are less exposed.

TK: Please describe your stock selection process.

JS: We start with the industry and attempt to understand the entire value chain. For example as we look to invest in the wind industry we start by identifying the companies that own and operate wind farms (typically renewable utilities). We identify all the turbine manufacturers, then break down the turbine into its components and identify all the companies that make blades, bearings, even the carbon fiber that is used in the blade. Through this process we look for areas of constraint in the value chain as investing in those often is quite profitable due to better pricing, margins, and profits. We then establish where we want to have exposure on a global basis – maybe we want exposure to the Chinese wind market but not the European market. After that, stock selection comes down to fundamental analysis and valuation. We also try to incorporate issues such as regulation, currencies, and other macro issues like credit availability.

TK: Recently you have been trading much more than the other fund managers I follow, holding your average position only about 6 months, while most funds I follow hold positions on average about two years. Is frequent trading intrinsic in your strategy?

JS: Yes, at the moment, as many of these industries are still heavily dependent on subsidies for survival. As those subsidies change, we may need to change our outlook on the industry. We have also been through several rounds of sovereign debt concerns, which have a broad impact on many companies in the investment universe. Over time, as the industries mature we would expect to be able to have longer holding periods. In some industries, we can already identify what we believe are long term investments.

TK: Your track record over the last three years has been excellent. The Gabelli SRI Green Fund is the only one I follow that is up since the start of 2008, and you're up 21% since then, while the next best performing fund is down 17% over the same period. Why do you think you've been so successful?

JS: We have deliberately attempted to be global in our understanding of the value chain. Often, we can gain exposure to an investment theme in a less obvious way – sort of the picks and shovels approach to investing. We also have decided that we do not need to maintain exposure to all areas of sustainability and when subsidies are in flux, we might reduce our solar or wind exposure to zero.

TK: Your fund is still quite small. What are the advantages and disadvantages of the small size?

JS: Certainly a smaller fund size helps us in terms of being able to enter and exit positions more rapidly if needed. Hopefully, as more investors realize the opportunities of investing in this manner, the fund will continue to grow. We do not foresee growth in the fund size as a barrier to achieving returns. Moreover, as the fund grows in size, the expense ratio will become less of an issue.

TK: Have you seen a substantial increase in investor inflows now that you've achieved Morningstar's highest five-star rating due to your track record?

JS: Yes, it has helped. I know that we have been on the radar screen of many advisors, and getting the five star rating often marks the trigger point for their investment process.

TK: Let's switch gears and talk about the market. What do you expect the next year to bring to the market as whole and sustainable companies in particular?

JS: I suspect that the market will remain choppy as many of the issues we are grappling with, such as European sovereign debt and even the debt that is mounting here in the US, will not be easily solved. Subsidies are under pressure and while some nations, such as Germany and China, have made strategic decisions to embrace sustainability issues, others, such as the US, have not. As countries continue to compete with each other for leadership in these industries (the space race of our generation), we expect a new engine of job creation and growth to emerge.

TK: Are there any sustainable sectors you expect to do particularly well in the coming year? Why

JS: We are generally cautious on the renewables at the moment as we believe overcapacity will lead to dramatic price declines which in turn will eventually lead to accelerating growth. That growth comes in waves; we believe third quarter 2010 was the peak. We will spend our time looking for the next entry point, when we believe shares have bottomed. We continue to focus on materials and commodities that will benefit from global growth. Industrialization and urbanization of the developing world remain important themes. We also continue to focus identifying companies that have exposure to longer term secular growth drivers, but that make simple products which will benefit if the industry takes off rather than by having to identify an individual company. Again, we often follow the picks and shovels approach to investing. Several battery and materials companies fit this approach.

TK: What are your top holdings right now? Why do you expect them to do well?

JS: Some of our holdings at the moment include Sino-Forest (TRE.TO), Umicore, Polypore (PPO), Globe Specialty Metals (GSM), Duksan High-Metal, GCL Polysilicon, Mead Johnson (MJN), and Novozymes (NVZMY.PK). Most have high exposure to stronger secular growth drivers and are strong beneficiaries of the growth in emerging markets. They also may benefit if the US dollar continues to weaken.

TK: What have you sold recently and why?

JS: We have sold most of our exposure to renewable, in particular solar, as we believe the market is entering a period of overcapacity and that margins have peaked. Additionally, market expectations have caught up to our view and the valuation gap had closed.

TK: Is there anything else you'd like to say?

JS: Just that we believe we are at the beginning of a significant investment opportunity that has only recently shifted from marginal to mainstream. We are looking at issues that could unfold over the next 10, 20, even 50 years and we believe there is still substantial value to be created by investing in the companies that are leading this change.

TK: Thank you for sharing your insights with us today.

JS: You are welcome. Anytime.

Conclusion

In general, I like what John had to say.  His process starts with understanding the value chain.  Because Clean Energy is such a new field, understanding the value chain is something many investors do not bother to do.  Until  Clean Energy becomes mainstream, this should be a lasting source of advantage.  He trades frequently, but with good reason: in reaction to the quickly shifting structure of subsidies that currently supports most clean energy technologies.  This should also be considered an advantage, at least until subsidies are not longer such a major factor in the profitability of many clean energy companies.

I would not be as complacent as he is about the costs of fund size... as assets under management grow, opportunities to invest in microcap companies disappear, as the money the fund would need to invest quickly dwarf's the stock's liquidity.  However, the advantages of fund size in the ability to spread management costs over a greater number of assets will probably be more significant than increasing liquidity costs for quite a while to come.

Would I invest in the Gabelli Green Fund?  The short answer is "yes."  If you agree with me that active mangement pays in alternative energy and climate change funds, then you should choose the fund that can make the best case for having the best manager.  If you're not convinced, you probably should not choose clean energy the mutual fund with the lowest costs, since you can acheive much lower costs with an ETF.  But if you want to hedge your bets, the two funds that seem to have a good balance of low cost, strong sector allocation, and past performance are the Winslow Green Growth Fund (WGGFX), and the New Alternatives Fund (NALFX).

Not convinced? Next week I'll take a look at the Clean Energy ETFs,

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.


November 23, 2010

In Clean Energy, Active Management Pays

Alternative Energy and Climate Change Mutual Funds, Part V

Tom Konrad, CFA

Actively managed clean energy funds have been producing better returns than index funds, despite much higher expenses.

I've long been critical of the costs of Alternative Energy mutual funds, but I now regret that stance. 

Past Performance of Mutual Funds

When I recently surveyed the performance of Alternative Energy mutual funds, I found the results were pretty good, at least in comparison to the oldest sector index fund, the Powershares Clean Energy Index (PBW).  See the following chart below, which shows the amount you would have had to invest in each of the alternative energy mutual funds at the start of any given year, in order to have $1,000 at the end of October 2010.  Lower values are better, so the lines at the bottom of the chart are the best performing mutual funds.

Performance of Alt E and Climate Change Mutual Funds Vs S&P 500
Note that the orange line, for the Powershares ETF, has performed worse than almost every mutual fund over three or more years.  A couple of the mutual funds performed worse than PBW over the last one or two years, but the shorter the time period in question, the more likely the result is to have been the result of luck than management skill.

Past Performance of ETFs

One possibility is that the apparent superiority of actively managed mutual funds is not the result of the mutual funds being superior, but because I might have chosen an inferior ETF.  In order to check, I performed a similar study on the broad Alternative Energy Sector ETFs:

ETF Performance
As you can see, PBW is the second-worst performing ETF since the start of 2008, although it has performed a little better over the last two years, so some of the mutual funds' apparent out performance is due to my selection of PBW as a benchmark.

But not all.  As you can see from the table below, the average clean energy mutual fund has outperformed the average clean energy ETF by 17% over the last 3 years (which is the entire track record for a majority of the existing funds and ETFs.)  Furthermore, the best mutual fund beat the best ETF by a whopping 52%, and even the worst performing mutual fund beat the worst performing ETF by 3%, so the actively managed mutual funds beat the passively managed ETFs across the board.

Performance Jan '08 to 11/14/10
Worst
Average
Best
Mutual Funds
-63% (GAAEX)
-37%
21% (SRICX)
ETFs
-66% (GEX)
-54%
-31% (PZD)
10 Stocks for 2008, '09, and '10.
-32%

Despite the fact that we only have three years of data, I'm now fairly confident that most investors would be better off choosing one of the clean energy mutual funds than they would be choosing one of the ETFs.  Which mutual fund should you pick?  That's the topic of this series of articles on Alternative Energy and Climate Change Mutual Funds.  So far, I have looked at mutual fund costs (part I), portfolio composition (part II) and past performance (part III).

Stocks Are Still Best

I've also picked out some interesting individual stocks from the mutual fund portfolios (part IV).  That is because, while I've reversed my former position and now think an actively managed mutual fund is better than a passively managed ETF, I've always said that an actively managed clean energy stock portfolio is the best of all worlds. 

An actively managed stock portfolio can be managed at lower cost than the sector ETFs, and much lower cost than the sector mutual funds.  It's also not particularly hard to build such an actively managed stock portfolio.  One approach is cherry-picking stocks from the portfolios of the mutual funds themselves, as I did in part IV of this series.  I tried a similar experiment in 2009 which I called a Quick Clean Energy Tracking Portfolio, and the resulting portfolio strongly outperformed the mutual funds it was built from, although that turned out to mostly due to my selection of high-Beta stocks for the portfolio.

Another easy way to build an actively managed stock portfolio is to use my annual "Ten Clean Energy Stocks" list, which I've been publishing at the start of the year since 2008.  While this is not a truly actively managed portfolio since it only trades once per year, the performance has been better than the vast majority of the mutual funds and ETFs, having lost only 32% since the start of 2008, while the average mutual fund lost 37%, and the average ETF lost 54%.  See the table above.

If you have the time and interest, you can manage a stock portfolio.  That's always been my favorite option, since I do it myself, but it's also practically a full-time job, at least if you want to do it well.

One last option is to use an investment advisor who will manage a portfolio of clean energy stocks for you.  So far, I know of three, although not all of them will take small accounts.  Use the contact link to send me an email if you'd like a referral.  You may also want to read what I have to say about selecting an advisor here.

If you are an advisor who manages green individual stock portfolios for your clients, let me know and I'll add you to my list.

DISCLOSURE: No Positions.  GAAEX is an advertiser on 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.

November 21, 2010

Alternative Energy and Climate Change Mutual Funds, Part IV

Tom Konrad CFA

Cherry picking the holdings of green energy mutual funds.

So far in this series I've concentrated on trying to pick the best of the Alternative Energy and Climate Change Mutual Funds.  This is a difficult task, because while I found in Part III that most of the funds' performance has been better than comparable index ETFs, these mutual funds' costs are quite high, even by the standards of most mutual funds, as I discussed in Part I.  In part II, I tried looking at the sector breakdown of the funds' holdings, to see if I could explain some of their performance that way.  It turns out that funds that buy the most solar stocks have underperformed in the past.

The underperfomance of solar-heavy funds confirms one of the principles of alternative energy sector selection that arise from common misunderstandings about how Alternative will re-shape our economy.  I went into them in more detail in part II, but in short they are:
  1. Underweight Solar
  2. Overweight biomass producers compared to their customers, biofuel producers.
  3. Focus on Energy Efficiency and Conservation.
  4. Invest in the Electric Grid.
  5. Favor Alternative Transport over the personal car.
What follows is my attempt to build a portfolio from the stocks owned by these mutual funds, but conforming to the principles above.

Fund Holdings: Solar Stocks

Many of the funds own large quantities of First Solar Inc (FSLR), SMA Solar Technology (S92.DE), MEMC Electronic Materials (WFR), and JA Solar Holdings (JASO).  First Solar is the largest holding of these mutual funds overall, accounting for 6.6% of the Winslow Green Growth Fund (WGGFX).  Overall, the average fund is about 24% allocated to solar, something I hope to improve on by leaving them out of the portfolio I'm building.

Fund Holdings: Biomass

By far the largest holding biomass holding in these companies is Sino-Forest Corp. (TRE.TO), a commercial forest plantation operator in China.  The second largest holding is Deltic Timber Corp. (DEL), but it's only held by one fund, the DWS Climate Change Fund Class S (WRMSX).  I'm looking for stocks held by at least two funds for this portfolio.

Fund Holdings: Energy Efficiency and Conservation

The top energy efficiency holding is also my personal favorite, Waterfurance Renewable Energy (WFI.TO), a manufacturer of Geothermal Heat Pumps.  Also held in quantity are Rubicon Technology (RBCN), which sells mono-crystalline sapphire and other crystals to the Light Emitting Diode (LED) industry, and LED industry leader Cree Inc (CREE).  In conservation, we have water system repair firm Pure Technologies Ltd. (PUR.V).

Fund Holdings: Electric Grid

The top electric grid holdings were meter-maker Itron (ITRI), and transmission contractor Quanta Services Inc (PWR), both of which I've written about in these pages

Fund Holdings: Alternative Transport

These funds are more focused on Climate Change than peak oil, so alternative transport stocks are few and far between, but one that's owned by three funds is Smart Grid and Smart Transport stock Telvent Git S.A. (TLVT).  In order to get a little more representation in this sector, I'm also going to include rail supply company Wabtec Corporation (WAB), even though it's owned by only one fund, WGGFX.

Green Energy Portfolio

This is my suggestion of a portfolio, which should perform better than most of the green energy mutual funds because of better sector selection and lower costs: TRE.TO, WFI.TO, RBCN, CREE, PUR.V, ITRI, PWR, TLVT, and WAB, equally weighted.  That's 11% Biomass, 45% Efficiency and Conservation, 27% Electric Grid, and 17% Alternative Transportation.  It's not representative of the market, but we're trying to beat the market here, not just match it.

I'll take a look back at this portfolio next year to document how it has performed relative to the mutual funds.

DISCLOSURE: Long PUR.V, WFI.TO, PWR.

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.

November 18, 2010

Alternative Energy and Climate Change Mutual Funds, Part III

Tom Konrad CFA

Past performance of green energy mutual funds.


In part I of this series, I looked at the full costs of alternative energy and climate change mutual funds.  I concluded that they were quite expensive, ranging from over 2% per year, to almost 6%.  In a stock market that has historically produced returns of about 10.5% per year, but has been flat for the last decade, even 2.5% in expenses per year would have resuted in a substantial loss of value.  In order to make up for the drag on returns, these mutual funds will have to show strong evidence of stock picking skill. 

In part II, I looked at the portfolio holdings to determine if they showed evidence of picking sectors likely to outperform, and selected the two funds I thought had the best combination of low costs and likelihood to outperform.  I believe that funds that hold to many solar stocks are likely to under perform because, while solar has a bright future, today's solar companies will probably not be the major participants.

Past Performance

While past performance, especially over just a few years, is no guarantee (or even an indication) of future results, we can still use it to check our intuition.  In the case of my theory that solar stocks tend to be a drag on the performance of mutual funds that hold to many of them, used Morningstar to put together the following chart of past returns for Alternative Energy and Climate Change against the S&P 500 over the last 10 years.

Performance of Alt E and Climate Change Mutual Funds Vs S&P 500
The eight mutual funds shown are the New Alternatives Fund (NALFX), the Guinness Atkinson Alternative Energy Fund (GAAEX), the Winslow Green Growth Fund (WGGFX), the Firsthand Alternative Energy Fund (ALTEX), the Allianz Global Eco Trends Fund (AECOX), the Calvert Global Alternative Energy Fund (CGACX), the DWS Climate Change Fund (WRMSX), and the Gabelli SRI Green Fund (SRICX).  For comparison, I've also included the past ten year performance of the S&P 500 index, and the performance of the oldest Alternative Energy Exchange Traded Fund (ETF), the Powershares Wilderhill Clean Energy Index (PBW). 

The chart is set up to show how much would need to have been invested in any given prior year in order to have $1000 to show for it at the end of October 2010.  I've included mutual fund loads in the calculations, but I have not accounted for any taxes investors might have to pay on capital gains distribution or on the sale of the fund.  With the chart set up this way, the best funds are those at the bottom of the graph, because you would have had to invest less in them to have $1,000 at the end of October 2010.

One thing worth noting is that the Clean Energy ETF, PBW, performed worse than almost all of the mutual funds, despite its lower costs.  As I noted the last time I took an in-depth look at Alternative Energy and Climate Change ETFs, PBW has a high (approximately 35%) allocation to solar stocks.  The average mutual fund has a 24% allocation to solar. 

Second, The two funds that I ended up liking best in part II of this series, the Winslow Green Growth Fund (WGGFX) and the New Alternatives Fund (NALFX) both outperformed the S&P 500 over their lifetimes, with the longer lived New Alternatives performing much better.

Third, the performance of the Gabelli SRI Green Fund (SRICX) beats all the others by a mile. Since January 2008, SRICX is up 21%, while the S&P 500 is down 17% and the next-bet performing of the funds over the same period (NALFX) is down 31%.  But the fund's costs are the highest of the lot. Could it be managerial skill?  It's hard to say after less than three years.  I've asked the lead manager, John Segrich, CFA for an interview about their strategy.  If he agrees, I'll publish the interview as a later entry in this series.

"High Solar" Fund Performance

Since the chart is rather busy, and most of the mutual funds don't have a long enough track record (only three years) to be able to say much about them with any confidence, I cleaned up the chart by eliminating the graphs of the new mutual funds, and replacing them with a composite mutual fund which averages the returns of the three funds that weight solar stocks most heavily.  This is the light blue line labeled "High Solar Funds."

Solar heavy funds vs NALFX WGGFX and PBW

In this cleaned-up chart, it's now clear that the funds with a high allocation to solar did significantly worse than the two low solar funds I picked in the last article, although they did do better than the (also high solar) PBW. 

Conclusion

While past performance does not say much about what will happen over the next few years, the evidence we have seems to support investing in Alternative Energy without putting too much of that investment in solar stocks.  If you want to use a mutual fund, it still looks like the best choices are NALFX (for longer holding periods) and WGGFX (for shorter holding periods), but I think we can do better than that by choosing our allocations according to the five principles I laid out in part II, and using individual stocks to avoid high mutual fund costs

The stocks for this portfolio can be drawn directly from the holdings of the mutual funds we've been discussing.  I'll list the stocks I'd choose in part IV of this series next week.

UPDATE: I've change my mind about my top mutual fund pick.  See: .


DISCLOSURE: No Positions.  GAAEX is an advertiser on 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.

November 08, 2010

Alternative Energy and Climate Change Mutual Funds, Part II

Tom Konrad CFA

Choosing the best green energy mutual fund.

In part I of this series, I looked at the costs and expenses of eight Climate Change and Alternative Energy focused Mutual Funds.  I concluded that four out of the eight, the Firsthand Alternative Energy Fund (ALTEX), the Guinness Atkinson Alternative Energy Fund (GAAEX), the Winslow Green Growth Fund (WGGFX), and the New Alternatives Fund (NALFX) each cost roughly 1.5% more in terms of expenses and trading costs per year than the typical Climate Change or Alternative Energy focused Exchange Traded Fund (ETF), with the other four costing 2.5% or more per year than the typical ETF.  I've included my chart of estimated total costs below.  Click on the chart for a link to the previous article containing a full explanation of the costs shown.

Expenses Including Trading Costs

Five Principles for Gaining an Edge in Alternative Energy and Climate Change Stocks

With even the least expensive mutual fund under the most generous cost assumptions costing a full 1% per year more than a typical clean energy ETF, the mutual fund managers will have to demonstrate considerable investment skill to justify the expenses. 

In general, it's very difficult to generate returns that beat the market, let alone returns that beat the market by an average of more than 1.5% per year.  This is the general argument against active management: active managers come with costs, but the average active manager will produce average returns.  If you agree with this argument, the best choice is to stick with a low cost, passively managed fund such as one of the sector ETF.

There are reasons to disagree, however.  The Alternative Energy sector is not yet well understood by most investors.  On one hand, a large portion of the population still denies the reality of Climate Change and is blithely unaware of Peak Oil.  On the other hand, we have a contingent of true believers, who understand both Climate Change and Peak Oil, but who are blinded by the unrealistic hope that Alternative Energy will allow us to replace fossil fuels without fundamentally changing the way we live

Both groups will almost certainly be proven wrong, and the investment manager who today understands how the economy must adapt to accommodate Alternative Energy should be able to outperform the mass of investors who either think nothing is happening, or think that Peak Oil and Climate Change can be "fixed" with cheap solar and electric cars.

I've been writing for years about what the real alternative energy future will look like, as opposed to what we might hope it to be.  Here are some basic differences from the wishful thinking scenario:
  1. To accommodate variable Wind and Solar, we need a more robust electric grid.
  2. All energy will become more expensive, so investing in energy efficiency and conservation is essential.
  3. Biofuel production is a commodity business, and the big winners are more likely to be the owners of the feedstock (biomass and waste) than the biofuel producers.
  4. Expensive fuel (including expensive batteries) will lead to shifts away from the personal car and towards alternative transportation solutions.
  5. Solar will be a large part of our electricity mix in 20-30 years, but that probably won't benefit today's Solar stocks.
Alternative Energy Sector Selection

If I'm right about these principles, then a successful money manager in Alternative energy will have a fairly small investment in Solar stocks, and larger investments in Energy Efficiency stocks, biomass stocks, alternative transportation, and the electric grid.  Unfortunately, there are not standard definitions of what constitutes stocks in each of the various Alternative Energy sectors, but over the last few years Charles Morand and I have built up a fairly comprehensive list of Alternative Energy stocks categorized into thirty subsectors.  I used this list, along with my knowledge of the companies and online company profiles to break down the eight mutual fund's holdings into twelve of the most commonly owned sectors.

The results are shown in the chart below.
Mutual Fund Energy Sector Breakdowns

Returning to my five principles for gaining an edge in Alternative Energy and Climate Change stocks, the easiest to apply is #5: a low allocation to Solar.  Of the four funds with relatively reasonable costs, the Firsthand Alternative Energy Fund (ALTEX), the Guinness Atkinson Alternative Energy Fund (GAAEX), the Winslow Green Growth Fund (WGGFX), and the New Alternatives Fund (NALFX), both ALTEX and GAAEX have high allocations to solar stocks. 

Applying the Principles

That leaves only the Winslow and New Alternatives Funds as worthy of serious consideration.  Checking principle #1, we note that both have about 7% of their portfolios invested in Electric Grid stocks, a slightly higher proportion than most other funds.  While this does not lead to a preference, it does help bolster the case that these fund managers may be adding value. 

Principle #2, which I consider the most important of the five principles, calls for a high allocation to energy efficiency and conservation.  The Winslow fund has a strong emphasis on Green Building which I did not see in any of the other funds, and many Green Building stocks contribute to the Efficiency category (they also contribute to "Other" since much of green building does not have to do with energy.) 

Principle #3 calls for a low allocation to biofuel producers, but a high allocation to Biomass and Waste (which falls under the Environmental/Recycle category in the chart.)  This would seem to lead to an added advantage for the Winslow fund, but a review of Winslow's Environmental/Recycling holdings shows that most of these are metal recyclers.  The New Alternative's much smaller holdings in this category are mostly focused on sewage treatment.

Principle #4 calls of a larger allocation to alternative modes of transportation.  The Winslow fund has a much higher allocation to Transportation and Batteries (7%) than the New Alternatives Fund (2%).  A closer look at the specific holdings show that the Winslow Fund's largest holding is Rail supplier Wabtec Corporation (WAB) at 3.5%, while New Alternatives' transportation allocation is the result of small slices of conglomerates most likely purchased for exposure to other sectors.  For instance, both funds have stakes in Smart Grid and Smart Transportation company Telvent GIT SA (TLVT).

Conclusion

If I had to pick one fund to outperform because of its well chosen energy sector exposures, it would have to be the Winslow Green Growth Fund (WGGFX).  That said, I believe the Winslow Fund only has a slight edge over the New Alternatives Fund (NALFX), and for someone who planned to own the mutual fund for at least a decade, I think NALFX's lower ongoing expenses would give it the edge in long term performance.  For an investor planning to hold one of the mutual funds for less than ten years, I think the Winslow Green Growth Fund is the best choice.

Of course, the least expensive way to get exposure to the right energy subsectors is by using individual stocks.  I will continue this series with a look at individual stocks from these mutual fund portfolios and use them to build an Alternative Energy and Climate Change portfolio at much lower cost than investing in any of these funds.  Such a portfolio should be able to take advantage of the fund managers' stock picking skill, but with greater emphasis on the energy sectors most likely to outperform.

UPDATE: I've change my mind about my top mutual fund pick.  See: .


DISCLOSURE: No Positions.  GAAEX is an advertiser on 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.

November 03, 2010

Alternative Energy and Climate Change Mutual Funds, Part I

Tom Konrad CFA

Understanding the costs of green energy mutual funds.

It's been a bit over a year since I last looked at the mutual funds in the Clean Energy sector.  Each year, I comb through their  portfolios for new ideas on where to invest my own funds and those of my green-minded clients, with the added bonus of being able to help readers make better decisions about which fund, if any, is right for them.

This year, I looked at the eight mutual funds from AltEnergyStocks' green mutual fund list.  In order of fund size, they are:
These are not the only "Green" or "Ecological" funds available.  Instead, they are the funds that I feel are the best match to my own focus on clean energy, although each manager has a slightly different slant to how they approach green investing.  There may be a few that should be here but aren't: I added the Gabelli fund to the list when a reader brought it to my attention.

Fund Costs

Far too many investors put their money in a mutual fund without properly considering the costs.  I think this is especially true for green minded investors, who may be more concerned about doing the right thing for the planet tahn doing the right thing for their finances. 

The chart below displays some of the costs of investing in these funds.  The dark blue "Max Load" are for mutual funds that have an up-front charge when you first invest.  Small investments pay this percentage (between 4.75% and 5.75% of the total investment) for the right to invest, after which they pay a somewhat reduced annual expense ratio every year. (The annual expense ratio for load funds ranges from 1.02% for the New Alternatives Fund to 2.01% of the Gabelli SRI Green Fund) shown below in light blue "Load Expense Ratio."   Larger investments in load funds may qualify for a somewhat reduced sales charge or load, as a percentage of the amount invested. 

No-load funds do not have an up-front charge, but typically have a slightly higher annual expense ratio, shown below in orange.  The Calvert, DWS, and Gabelli funds allow both options, which is why they have two ticker symbols.  Typically the no-load shares are called Class C shares, while the load shares are usually called Class A shares.  No-load class C shares charge annual expense ratios ranging from 1.45% for the Winslow Green Growth Fund, to as much as 2.85% for the Calvert Global Alternative Energy Fund.  Other share classes are often available to institutional investors, but I have chosen not to display them here since they are unlikely to be relevant to most of my readers.

Mutual Fund Expenses

Even the least expensive of these fund charges more than 1% each year to manage your money.  Over time, that is a large drag on fund performance, so an investor should be confident that the fund manager is adding considerable value before investing in one of these funds.  If the manager is not adding considerable value, it makes more sense to invest using a typical clean energy Exchange Traded Fund (ETFs).  I've included the expenses for a typical ETF in the chart for comparison.  In the case of an ETF, the "load" is the fixed brokerage commission you pay to buy the ETF; I assumed a $10 commission on a $1000 investment.

Fund Size and Expenses

It's no coincidence that the largest funds (shown at the bottom of the chart) have the lowest expenses.  There are a large number of fixed costs involved in running a mutual fund, and these show up in higher expenses (as a percentage of invested assets) for investors. 

Other Expenses

While a manager cannot do a lot about the size of his fund, one source of expense he can control is trading costs.  Each time a portfolio manager makes a trade, he incurs transaction costs in terms of brokerage fees, liquidity costs, and potential capital gains.  Depending on how liquid the stocks are, and if the fund frequently trades in foreign markets, brokerage commissions and liquidity costs can range from 0.5% to as much as 2% or more of the value of a trade.  If the fund has made profitable investments, any gain on a sale will have to be distributed to fund shareholders at the end of the year in the form of a capital gain distribution, on which tax must be paid.  This is an added burden of trading for taxable investors.

Turnover Ratios

A fund's annual turnover ratio measures how often the manager trades in and out of positions, measured as the percentage of the portfolio that is traded every year.  Funds with annual turnover ratios in excess of 100% trade each position more than once per year.  Each fund's annual turnover ratio is shown in the chart above.

Conclusion

On the (fairly conservative) assumption that trading costs amount to about 1% of trade value, I have combined typical fund expenses with estimated trading costs.  The results are shown below.  The dark blue band represents the cost of the front-end load spread over a ten year holding period, while the dark blue and light blue together represent the cost of the load if it only spread over five years.  The three dark green to pale yellow bands should also be read cumulatively, with the lighter bands added on if we assume the fund's trading costs are higher rather than lower.  The lighter shades of blue and yellow represent a lower likelihood that these costs will occur.

Expenses Including Trading Costs

Solely in terms of cost, the clean energy ETFs remain by far the best option.  After that, the no-load funds the Winslow Green Growth Fund (WGGFX), the Firsthand Alternative Energy Fund (ALTEX), and the Guinness Atkinson Alternative Energy Fund (GAAEX) all have roughly comparable costs depending on your assumption about internal transaction costs, with low estimates of transaction costs favoring the low-turnover Guinness Atkinson fund.  For a ten year holding period, the total costs of the New Alternatives Fund (NALFX) are by far the best deal, but this load fund is only comparable to these no-load funds over a five year holding period, and would be considerably worse over shorter holding periods.

In contrast the Gabelli SRI Green Fund (SRIGX and SRICX), the DWS Climate Change Fund (WRMAX and WRMSX), the Allianz Global Eco Trends Fund (AECOX), and the Calvert Global Alternative Energy Fund (CGACX and CGAEX) are more expensive than the three funds listed above, let alone the sector ETFs.  The Gabelli fund not only has extremely high expenses due to its tiny size, but it then adds to these expenses with frenetic trading expressed in an unmatched turnover ratio of 190%.  The Calvert funds could also do much better as well: although they have done a reasonable job fighting transaction costs by keeping turnover down, the large fund size, at four times that of the considerably less expensive Guinness Atkinson fund, leaves considerable scope for reducing investor costs.

Investors who choose the Firsthand, Guinness Atkinson, Winslow Green Growth, Firsthand, or New Alternatives funds will pay roughly 1 to 1.5 percent per year for the active management available in these funds.  Given that Alternative Energy is a new and evolving sector without extensive analyst coverage, active managers may be able to gain enough of a market edge to pay for those additional costs.  I will look deeper into these four fund managers' strategies and holdings in future articles to try to determine which ones are most likely to be producing value for money.

UPDATE: I've change my mind about my top mutual fund pick.  See: .


DISCLOSURE: No Positions.  GAAEX is an advertiser on 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.

February 01, 2010

Why Investors Should Pay Attention to Portfolio 21’s Top 10 Green Companies

Bill Paul

Not every investor wants to be a green investor, but every investor – institutional and individual alike – should be prepared to take advantage of a company’s greenness.

According to a recent study sponsored by Environmental Leader, an online publisher, consumers are willing to spend more on products and services that they consider to be environmentally-friendly. That’s why 82% of respondents said they plan to use more green messaging in their marketing.

But how can an investor tell a genuinely green firm from the phony ones that practice “greenwashing?” One place to look is Portfolio 21.

As we note on EnergyTechStocks.com, Portfolio 21 is a well-established mutual fund that looks for environmentally-friendly business practices by companies in a variety of industries. The fund’s shares are up over 37% from a year ago and the other day it announced its list of “Top 10 Green Companies.” While greenness certainly isn’t the only factor that goes into a company’s share price, the following 10 firms have products and services that figure to have a little extra going for them.

Autodesk (Symbol ADSK) made the list because, according to Portfolio 21, the company makes software that supports sustainable building practices. East Japan Railway (Symbol EJPRY) made the list because rail transportation is inherently more energy efficient than trucking, and because the company keeps reducing its own energy consumption.

Henkel (Symbol HENKY) was recognized for its wide range of bio-based detergents and adhesives. Itron (Symbol ITRI), meanwhile, was cited because its core business is metering and software that serve to reduce energy consumption.

Brazil’s Natura Cosmeticos (Symbol NUACF) was recognized for its sustainable use of natural resources. Similarly, Potlatch (Symbol PCH) was recognized for its sustainable forestry practices.

Red Electrica (Symbol RDEIY), Spain’s leading power transmission company, was cited for its role in facilitating Spain’s rapidly-growing alternative power generation business. Japanese consumer products giant Sharp (Symbol SHCAY) made the list for manufacturing products that incorporate energy and resource efficiency and recyclability.

Belgium’s Umicore (Symbol UMI) was recognized for being the world’s leading recycler of precious metals, while Denmark’s Vestas (Symbol VWDRY) was recognized not just for being a wind power manufacturer but for its own sustainable manufacturing practices.

DISCLOSURE: No position.

DISCLAIMER: This is a news article.  Please read terms and policy.

Bill Paul is Managing Editor of EnergyTechStocks.com.

January 22, 2010

The Holdings of the Powershares Global Progressive Transport Portfolio ETF (PTRP)

Tom Konrad, CFA

I included the Powershares Global Progressive Transport Portfolio (PTRP) as an investment option instead of three stocks in my Ten Clean Energy Stocks for 2010, as part of a simplified portfolio for small investors wanting to minimize costs by making fewer trades.  The other Exchange Traded Fund I used in this way was the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (GRID).  I took a look at the holdings of the Smart Grid ETF here, and they are not exactly what you would expect from the name.  Since it makes sense to know what you're buying, I decided to do the same for PTRP.

The left side of the chart below shows my classification of the companies held by PTRP (as of the end of 2009).  Some companies fell into multiple categories, so I divided their industry allocation accordingly.  The right side shows a similar treatment for the three stocks I suggested substituting PTRP for in my "10 for '10" portfolio (New Flyer (NFYIF.PK-bus), Portec Rail Products (PTRP-rail), and First Group PLC (FGP.L - Bus & Rail))

Notes on Categories

  • Smart Transit: routing traffic/freight/etc. more intelligently
  • Efficient Vehicles: Improvements to internal combustion engines, and materials to lighten vehicles.
  • Alt Fuel: mostly natural gas, but some propane and hydrogen as well.
  • Electric/Battery: Battery manufacturers, material suppliers, and suppliers of electric motors and transmissions.
  • Other: the non-transportation parts of the businesses of included companies.

Comparison with the 10 for '10 Portfolio

As you can see, PTRP is far from a perfect substitution for the 3 stocks from my 10 for '10 portfolio.  This is for several reasons:

  1. While I included a battery company (C&D Technologies (CHP)) in the 10 for '10 portfolio, I counted it as a "grid" investment as opposed to an electrified transport investment (since batteries serve both functions.)  If both substitutions for grid and transport investments are made, the allocation to batteries actually works out fairly well.
  2. My favorite transport investments are alternative modes that directly reduce fuel use, such as rail transit, bus transit, and bicycles.
  3. I did not include a bicycle investment in the 10 for '10 portfolio because none trade in the US or Canada.  One of the things I like most about PTRP is the 8% allocation to bicycle companies.

I don't expect that PTRP will track the three companies from the 10 for '10 portfolio very well, but the greater diversity of the holdings makes it a little less risky.  The downside, however, is that I chose the large allocation to busses for a reason: I think this is the quickest and cheapest option (other than bicycles) we have when we finally get serious about reducing our dependence on petroleum.  Such a decision probably won't be voluntary.  Rather, it will be the consequence of our near total unpreparedness for the reality of peak oil.  That very unprepardness is what gives busses and bus rapid transit an advantage over rail based transit: it takes a lot less time and money to order buses and designate a bus lane than it does to build a rail transit system.

DISCLOSURE: Long NFYIF,  PRPX, CHP.

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.

November 23, 2009

Is the New Smart Grid ETF GRID All That Smart?

Tom Konrad, CFA

First Trust Launched a Grid Infrastructure Exchange Traded Fund (ETF) on November 17th.  Although the First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund (Nasdaq: GRID) is labeled a "Smart Grid" ETF to capture popular excitement around smart grid technology, it covers the whole grid infrastructure sector.  This broader focus is good for clean energy investors.

I've been an advocate of investing in electric transmission and smart gird stocks since early 2007, and for almost a year now, a regular reader has been telling me to create a transmission ETF so he can buy it.  Now I don't have to: First Trust's new GRID ETF will do quite nicely.

griD Breakdown.PNGThe ETF's holdings are not those of a smart grid index.  The top holding, accounting for nearly one eighth of GRID by value, is SMA Solar (S92.DE), a leading German solar inverter company.  While I'm more enthusiastic about inverters than any other part of the solar sector, and it also makes sense to classify them as grid technology, it's quite a stretch to call them "Smart Grid."  Three other holdings, Power-One (PWER), SatCon (SATC), and Advanced Energy Industries (AEIS) also fall into this category.

The chart to the left shows a rough classification of the 29 holdings.  Overall, I found that only 23% of ETF assets were in smart grid technologies, and 34% were in older style grid infrastructure.  Solar, Wind, Energy Efficiency, and Electricity storage accounted for 11%, 9%, 6%, and 2% respectively.  The balance (Other - 15%) was the non-grid, non-green energy related businesses of these companies.  

None of these percentages are precise... such an assessment would have required sifting through company financial statements to determine what percentage of revenues or earnings came from each business.  Instead, the breakdowns are my best guesses based on my familiarity with the companies involved, many of which have been profiled in these pages.

Not Smart, but Not A Problem

I like the GRID ETF as part of a green energy port folio, despite "Smart Grid" may be a misnomer.   In fact, I like it better than I would if the fund were solely focused on Smart Grid companies.  While I'm a fan of Smart Grid stocks, so much so that I suggested that our new writer, Joyce Crane, do a series on smart grid companies, I think smart grid is too narrow a focus for an index or ETF.  GRID's much broader focus on electric grid infrastructure should bring much steadier and surer long term returns.

For instance, just before I heard about GRID's launch, I wrote an article explaining why transmission is so essential to renewable energy, and listing eight companies readers might consider.  Those, along with two I added as an afterthought in a comment, constitute 32% of the portfolio.  

Smart Grid Stocks

For readers interested in pure smart grid investments, take a look at the specific stocks that are almost totally light green on the left.  Of these, we've published recent articles on RuggedCom (RUGGF.PK, RCM.CN): One about the RuggedCom's business and the other on its attractiveness as a stock. Digi International (DGII) is profiled hereEchelon (ELON), EnerNOC (ENOC), and Comverge (COMV) are also worth considering.

Personally, I'll most likely purchase the ETF as a whole rather than individual stocks the next time I think the market  is attractively valued.  The advantage is instant diversification, and easy access to interesting foreign-listed firms SMA Solar (S92.DE), NGK Insulators (5333.JP), and Schneider Electric (SBGSF.PK, SU.FP), which together account for 28% of the ETF.

The Fund's expense ratio is currently capped at 0.70%.

DISCLOSURE: LONG PWER, SATC, RUGGF, ELON.

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.

October 14, 2009

Oil & Alt Energy Redux

Charles Morand

Last week, I conducted an analysis showing the lack of evidence supporting claims that oil and alt energy returns are strongly correlated (claims that sometimes come from outfits as reputable as Bank of America Merrill Lynch).    

I don't want to belabor this topic but I thought I would post the results of another, similar analysis I conducted following comments I received on how to improve the first one. In a nutshell, the comments suggested I do the following:

1) Look at daily correlations or even smaller periods, as "common knowledge" market movements can often dominate over the real relationship in the short and very short run

2) Look at absolute (price) correlations as well as relative (return) correlations (my first analysis looked only at relative movements)

3) Look at directionality (i.e. what % of the time do assets X and Y move in the same direction regardless of the size of the move)

4) Extent your analysis to five years or greater

New Analysis, Same Difference

The three sets of tables below show daily return correlation coefficients, daily price correlation coefficients and daily directionality statistics (% of days that the assets close Up, Down or No Movement together) for oil, nat gas, the S&P 500 and alt energy stocks.

The time periods have been extended from three to five years or since inception. The oldest alt energy ETF available is PBW that was listed on March 03, 2005 - not quite 5 years but a decent chunk of time nonetheless. The other 3 ETFs (sector specific) were all listed in the 2nd half of 2008.


Correl Returns Oct 14-09_3.bmp

Correl Prices Oct 14-09.bmp


Correl Returns Oct 14-09_2.bmp

The first set of tables show that returns on oil are not particularly useful at explaining returns on alt energy stocks on a daily basis (let's say that we enter useful territory at 0.5 and above), although the results for PBW show the relationship strengthening somewhat in the last year (which has been anything but a normal year for the markets). These results are in line with those from my previous analysis which looked at weekly returns.

As far as absolute prices go (the second set of tables), correlation coefficients for oil and alt energy are high, but they are just as high if not higher for alt energy and the S&P 500. PBW shows the relationship strengthening over time, but it strengthened even more between oil and the S&P 500, something Tom opined might be the case a few months ago.

I don't find absolute price correlations all that useful. In the medium and long terms, returns matter far more than absolute prices. If a $1 movement in oil consistently results in a $1 movement in an alt energy ETF over the long run, the high coefficient could obscure a divergence trend between the returns on both assets as their prices rise.

Finally, the directionality tables (note that assets appear in a different order) show a fair bit of co-directionality between oil and alt energy (with the exception of PTRP [alternative transportation], something Tom and I discussed last week). But here again, the S&P 500 emerges as the stronger predictor.

Conclusion

I did not go any more granular than daily data: anything beyond that becomes relevant only to traders.

Once again, the general conclusion that emerges from this analysis is that oil - whether in terms of returns, prices or directionality - is not a particularly useful indicator to go by when investing in alt energy stocks, especially when compared to equity markets in general (i.e. the S&P 500).

The implication for investors is that they should not invest in alt energy as a hedge against or a play on rising oil prices. If anything, what little relationship does exist will probably tend to disappear overtime as alt energy and cleantech stocks respond more to core business fundamentals than to seemingly logical yet unproven narratives about external drivers.  

DISCLOSURE: None

October 13, 2009

Green Energy ETFs Compared

UPDATE 3/4/2011: An up-to date article on selecting green mutual funds and ETFs can be found here.

Green energy Exchange Traded Funds (ETFs) are the simplest way to invest in the sector at reasonable expense.  Here is what you need to know to choose.

Tom Konrad, Ph.D., CFA

Why ETFs?

Investors interested in a simple way to invest in a diverse basket of renewable energy and energy efficiency companies should consider Exchange Traded Funds (a.k.a. ETFs) first.  Although green energy mutual funds will be more familiar to many investors, they come with costs that are difficult to justify in comparison.  The following chart compares the annual expense ratio, or the percentage of fund assets which an investor pays every year for ETF fund management and expenses, compared to the expense ratio of one of the less expensive green energy mutual funds.  (See my recent article comparing the green energy mutual funds.)

etfexpense.PNG

Defenders of mutual funds will note that the cost chart is a bit deceptive, since the Guinness Atkinson Alternative Energy Fund (GAAEX), which is shown, does not have a front-end load (i.e. there is no cost to make the initial investment), but an ETF purchaser must pay a brokerage commission to buy an ETF.  While true, discount brokers have driven commissions so low that this is not a significant advantage.  Many brokers offer a number of free trades for opening a new account or maintaining a certain balance.  When there is no cost to buy or sell the ETF, the argument in favor of mutual funds evaporates.  

Even if the ETF buyer did not qualify for free trades, the comparison still favors the ETFs.  GAAEX has a minimum investment of $5000 for new investors.  To invest that much in an ETF through a discount broker would cost $12.95 at Charles Schwab (or considerably less at other discount brokers.)  That's a 0.1% to 0.26% brokerage commission, meaning that if you were buying an ETF with one of the highest expense ratios (0.7%) at Schwab (+0.26%), you would have broken even after holding the ETF for only 3 months.  Three months is a lot better payback than you're likely to get from solar panels!

Green Energy Sectors

The other advantage of Green Energy ETFs is sector selection.  For the most part, the green energy ETFs are more narrowly focused on  green energy than the mutual funds.  This means that the ETFs are more volatile than the funds, rising more when the sector is doing well, but falling faster when it's doing badly.  

Several of the mutual funds contain more than 10% of their portfolios in companies I would not classify as green energy at all.  Among the ETFs, that is only true for the Forestry ETFs, CUT and WOOD, which I include as a way to get exposure to biomass, but which were not designed with clean energy or climate change in mind.

The sector breakdown chart below is a team effort.  AltEnergyStocks.com editor Charles Morand provided the data on the five general ETFs (PBD, QCLN, GEX, ICLN, and PBW) when he took a look at these five in May.  I have since extended his analysis to the sub-sector ETFs shown.

etfholdings.PNG

The Best Green ETFs

At the Rocky Mountain Institute, an energy "think and do" tank, they remind us that when we're greening our homes, we should eat our energy efficiency "vegetables" before having our renewable energy "dessert."   The same is true for greening our portfolios.  

The First Trust Nasdaq Clean Edge US Liquid Index Fund (QCLN) does the best job of giving our portfolio a healthy serving of energy efficiency, compared to both the other ETFs and the green mutual funds, and also has the second lowest expense ratio.  If you are going to make a single investment in green energy, QCLN is my top pick.

For investors who qualify for free trades (see above), or investors putting enough into the sector that their commissions are just a fraction of a percent of the money invested, I suggest putting 80% of your money in QCLN and 20% in PTRP, the Powershares Global Progressive Transport Portfolio.  For the most part, PTRP is also a serving of "vegetables" in the form of efficient transport, such as mass transit, hybrid vehicles, and even bicycles.  Incidentally, bicycle dealers are having a record year even without a "cash for clunkers" scheme.  [Note: this is a UK number. According to a commenter, the US numbers were down.]

One or two trades, and a balanced green energy portfolio is yours at very low cost.  While you are unlikely to out-perform the sector, unlike readers who bought my 10 Green Energy Stocks for 2009 at the start of the year, you're going to spend a lot less of your time doing it.  The "10 stocks for 2009" investors had a lot less of an idea what they were getting.

DISCLOSURE: GAAEX is an advertiser on 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.

October 11, 2009

Green Energy Mutual Funds Compared

UPDATE 3/4/2011: An up-to-date article on selecting green mutual funds and ETFs can be found here.

Most investors looking to get into clean energy think first of mutual funds.  Here are the options, and how to choose.

We track seven mutual funds with a focus on green energy and climate change at AltEnergyStocks.com, since the American Trust Alternatives Fund closed early this year.  I split them into two categories: the funds with a primary focus on clean energy, and those with a primary focus on the environment.  

The clean energy funds are: the Firsthand Alternative Energy Fund (ALTEX), the Guinness Atkinson Alternative Energy Fund (GAAEX), and the Calvert Global Alternative Energy Fund (CGAEX/CGACX).  The environmental funds are the Allianz Global Eco Trends Fund (AECOX), the DWS Climate Change Fund (WRMSX), the New Alternatives FD Inc (NALFX), and the Winslow Green Growth Fund (WGGFX).

Since carbon emissions from energy use are the major driver of climate change, there is a large overlap between the strategies of the environmental funds and energy funds, but there are still meaningful differences.  First, while energy and water are closely linked, the clean energy funds seldom have any investments in water infrastructure.  In contrast, the environmental funds not only have significant investments in water, they also invest in environmental clean-up and waste management to a much greater extent than the energy funds.

Fund Holdings

Below is a breakdown of these mutual funds' holdings, based on the mutual funds' own classifications or my classifications of the stocks in their portfolios, depending on what information I was able to find using Morningstar and the funds' sponsor web pages.fund breakdown.PNG

The sector breakdown shown here is only approximate for AECOX and WRMSX, because I was only able to find the top ten holdings of each of these funds, and the industry break-downs published by these funds do not differentiate between types of alternative energy. 

After the significant allocations to water infrastructure and environmental cleanup among the environmental funds, the most noticeable difference between these two groups of funds is the allocation to solar energy.  This also makes sense given the two groups' focus.  There is little argument that solar has great potential to provide a large proportion of the electricity that society needs.  However, the current potential for solar power to significantly reduce carbon emissions from energy production are limited by the current high cost of the technology.  That will change as the cost comes down, but until it does, investors interested in reducing harmful greenhouse gasses will be much more effective if they place their investments in efficiency, wind, or forestry.

In short the choice between the environmental group of funds and the clean energy group should rest on your goals as an investor.  Investors who are most interested in preserving the environment for future generations will prefer funds from the environmental group, while investors looking to profit from the transition to clean energy will prefer funds in the clean energy group.

Costs

Investors should also consider cost when looking at any investment.  Below is a chart of the costs of investing in each of these funds, with the data from Morningstar. fund costs.PNG

An investor pays the front-end load just to make an investment in fund that have them.  Larger investments may reduce the percentage front-end load from those shown.  The expense ratio is the percentage of the investment which goes to pay the mutual fund's expenses every year.  Institutional expense ratio is the expense ratio paid by 401(k) plans and other institutional investors which the fund grants a discount in return for a large amount of business.  The Calvert fund offers both "C" shares (CGACX), with no front-end load but a higher annual expense ratio, and "A" shares (CGAEX), with a front-end load but lower annual expenses.

If you can invest in any of these funds through a 401(k) or other sponsored retirement plan (as opposed to an IRA), you will generally be paying the institutional expense ratio.  As an individual, you will generally have to pay both the front-end-load (if any), and the ongoing annual expense ratio.

In general, these expenses are all very high by the standards of mutual funds.  Because of these high costs, I generally recommend investing in a green energy Exchange Traded Fund(ETF), rather than a green energy mutual fund.  I've shown the approximate cost of investing in a green energy ETF on the same chart for comparison.  I will publish an article comparing the green energy ETFs here in the next few days. (The link will be broken until then.)

The Best Green Mutual Funds

If you still prefer a green mutual fund despite the cost, the best choice among the environmental funds is clearly the Winslow Green Growth Fund (WGGFX).  The lack of front-end load for this fund means that an investor in the New Alternatives fund (the only environmental fund with a lower annual expense ratio) would have to wait 15 years before the lower annual expenses were enough to pay back the high up-front cost.

Among the clean energy funds, I think the Guinness Atkinson fund (GAAEX) is the least unappealing.  While its expense ratio is still a high 1.69%, it has no front-end load, and even this high annual expense ratio is lower than the annual expenses of the other clean energy focused funds.  I also prefer the Guinness Atkinson fund to the First Hand fund because of the more diverse portfolio.  Solar is the most volatile of green energy sectors, and ALTEX's large allocation to solar means that an investor in the fund gains fewer benefits of diversification than an investor in GAAEX.

However, most investors who have the option will be better off in a green energy ETF than a green energy mutual fund.

DISCLOSURE: GAAEX is an advertiser on 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.

 

October 07, 2009

Crude Oil & Alt Energy: The Non-Relationship That Just Won't Go Away

Charles Morand

The relationship - or lack thereof - between oil prices and the performance of alt energy stocks has been a long-time interest of mine. I discussed it last in late March when I looked at correlations between the daily returns of alt energy and fossil energy ETFs. At the time, I found that only a weak relationship existed between the two and that if someone wanted to make a thematic investment play on Peak Oil, alt energy ETFs were not an ideal way to do so. 

Seeing as the popular press and countless "experts" continue to claim, whenever they get a chance, that the fortunes of alternative energy stocks are closely tied to the price of oil, I figured I would revisit the topic.

Fossil & Alternative Energy: The Relationship That Isn't There

This time around, I took a slightly different approach for my analysis: I correlated the weekly returns for US oil and US natural gas directly (as opposed to through an ETF) with returns for the S&P 500 and four alt energy ETFs. For US Oil and Nat Gas, I used price data provided by the Energy Information Administration here (Spot Price FOB Weighted by Estimated Export Volume) and here (Contract 1), respectively. I got ETF and S&P 500 price and index value data from Google Finance.

For the ETFs, I picked the Claymore/Mac Global Solar Index ETF (TAN) as the solar sector representative, because I took a position in it in March (which I liquidated last week even though I initially claimed I would hang on to it for 18 to 24 months. I have now grown more worried about downside risk than I am optimistic about upside prospects over that time horizon, so I took my money out).     

The other ETFs were: the First Trust Global Wind Energy Index (FAN) for wind, because it represents a more direct play on the sector than the alternative; the PowerShares Clean Energy (PBW) ETF for alt energy other than solar and wind, as an analysis I conducted earlier this year indicated it is the best way to access other sectors; and the Powershares Global Progressive Transport (PTRP) ETF, as it provides the only proxy I know of for returns on a basket of stocks with exposure to alternative modes of transportation.          

The graph below displays returns for all four ETFs, Oil, Nat Gas and the S&P 500 between Jan. 1, 2007 and Sep. 25, 2009 (click on the image for a large view).             

Oct 7-09 Chart 1_2.bmp

The table below shows returns and volatility for all seven assets over the same time interval but broken down into sub-periods. Seeing as 2009 and the post-Lehman collapse period have been eventful times to say the least, I thought it would make sense to create a few distinct sub-periods for analytical purposes.

What jumped out at me from this table is the relatively strong performance of the Powershares Global Progressive Transport (PTRP) ETF, even after adjusting for volatility. As the correlation analysis below demonstrates, this performance is not due to a rise in oil prices.

My going theory is that there is a Green Stimulus Effect at work given how much of global stimulus dollars have gone to transportation programs. This would be something worth exploring further but it certainly seems in line, at least on the surface, with a prediction I made nearly one year ago. 

Oct 7-09 Fig 1_2.bmp

The following three tables contain the real meat of my analysis. They are fairly self-explanatory: they show correlation coefficients between US Oil, US Nat Gas and the S&P 500 with all other assets. The correlations are for the periods outlined in the tables or since inception in the case of PTRP (Sep. 19, 2008), TAN (Apr. 18, 2008) and FAN (Jun. 20, 2008). The correlation coefficients above 0.5 are highlighted.


Oct 7-09 Fig 2.bmp

These results are, once again, in line with my expectations: there is little reason to believe that there is a strong relationship between changes in the price of oil and the performance of alt energy stocks. Even for natural gas, where one could expect a correlation with wind and solar given that all three fuels are used in power generation (or load abatement), there does not seem to be a strong relationship.

TAN and FAN have not yet been around for long enough to analyze returns going very far back into the past, but PBW has. Although the correlation between PBW's returns and oil's returns seems to have strengthened somewhat in the past year, it certainly does not qualify as strong.

I must admit that I was fairly surprised to find such a low correlation between the returns on oil and those on the PTRP ETF. My guess is that this ETF hasn't been around long enough, and that a relationship might emerge under an extreme Peak Oil scenario. That said, spending on public transportation is heavily dependent on the fiscal health of various levels of government, and we've just been moved from the emergency room to the critical care unit.    

On the other hand, I was not particularly surprised to see that returns for all four alt energy ETFs are strongly correlated with returns for the S&P 500 - that seems intuitive enough given that they all belong to the same asset class. 

Conclusion

It doesn't really matter how one slices and dices the data: there just does not appear to be a strong relationship between returns on oil and returns on alt energy stocks, including alternative modes of transportation.

That's not going to matter to a great many commentators who will continue to claim in newspaper and magazine articles, on blogs and on TV that the success of alt energy stocks is closely tied to the price of crude, even though that's mostly untrue.

Those who invest in alt energy should, however, pay close attention. These results suggest that there are far more important factors than oil prices, most notably returns in equity markets in general and regulatory incentives by governments.

There is a good chance that equity returns and returns on oil will diverge in the next couple of years as oil prices climb and equities stagnate or decline. If such a scenario materializes, those who have the relationship backwards could be in for unpleasant surprises.   
  
DISCLOSURE: None

September 28, 2009

A Better Way to Play Green Stocks?

My Quick Clean Energy Tracking Portfolio continues to outperform all benchmarks and expectations... is it luck, or did I stumble onto a better way to invest in green energy stocks?

I continue to be stunned at how the portfolio which I intended as an easy way to duplicate green energy mutual fund performance at much lower cost continues to blow those green mutual funds out of the water.  I last published an update on this portfolio at the end of May, and was shocked to find that it had beaten the funds it was intended to replicate by over 20% in 3 months.  The trend continues... it's now almost 7 months later, and the portfolio has widened its lead over the mutual funds by 30%.

Winners and Losers

In May, I hypothesized that the out performance might have been due to how I constructed the portfolio: I chose five stocks from the top holdings of the mutual funds which had performed worst over the preceding three years.  I did this because there is a fairly well-documented winner-loser effect [pdf], that shows systematic price reversals in stocks that show long-term gains or losses.  In particular, stocks showing long term losses are more likely to make gains in following years than long term winners.

I tried to test if the out-performance was solely due to winner-loser effects by going back to my original data and seeing how a portfolio constructed with winners rather than losers would fare.  To my surprise, the "winners" portfolio also significantly outperformed the mutual funds (by 10% over 3 months).  I've updated the performance of the "winners" portfolio as well, and it also has increased it's gains compared to the mutual fund portfolio, and is now outperforming by 15% over 7 months.

Winner-loser effects seem to be playing a role, but at most, they explain about a quarter of the out-performance of the "Losers" portfolio so far.  There may be other, as yet unknown, causes of the superior performance of the "Losers" portfolio.  

No matter what the cause, for winner-loser effects to explain all of the difference, the "Winners" portfolio would have to be under-performing the mutual funds by about as much as the "Losers" portfolio is outperforming.  Where did the other three quarters of the out-performance come from?  Is it just luck?

"Losers" Tracking Portfolio

Company Shares Price 2/27/09 Close 9/24/09 % Change
Citrix Systems (CTXS) 48 $20.58 $37.65 82.94%
Echelon Corporation (ELON) 165 $5.99 $12.82 114.02%
SunTech Power (STP) 162 $6.09 $15.96 162.07%
Cemig (CIG) 94* $10.47* $14.66 40.02%
Vestas Wind Systems (VWSYF.PK) 22 $44.85 $69.50 54.96%
Total   $4998.65 $9,415.06 88.35%

*Dividend and split adjusted.

"Winners" Tracking Portfolio:

Company Shares Price 2/27/09 Price Close 9/24/09 % Change
LSB Industries (LXU) 114 $8.66 $15.34 77.14%
Echelon Corporation (ELON) 165 $5.99 $12.82 114.02%
First Solar Inc (FSLR) 9 $105.74 $150.62 42.44%
South Jersey Industries (SJI) 28* $35.11* $34.83 -0.80%
American Superconductor (AMSC) 23 $13.46 $29.73 120.88%
Total   $4975.30 $8,394.90 71.10%

*Dividend adjusted.

Mutual Fund Portfolio

Mutual Fund Shares Price 2/27/09 Close 9/24/09 % Change
CGAEX (Calvert) 122.19 $6.82 $10.29 51%
ALTEX (First Hand) 171.47 $4.86 $7.20 48%
GAAEX (Guinness Atkinson) 205.76 $4.05 $6.49 60%
NALFX (New Alternatives) 29.75 $26.68 $41.51 56%
WGGFX (Winslow Green Growth) 111.71 $7.46 $12.28 65%
Total   $4999.98 $7,794.71 56%

The Other Three Quarters

Since I did the first update, I've come up with three hypotheses to explain the phenomenon:

  1. Higher Beta: The stocks I picked may be more sensitive to market moves than the mutual funds as a whole.  Since the market has been rising, the "Winner" and "Loser" portfolios have been rising more.
  2. Cleantech sectors: My picks put more emphasis on certain Cleantech sectors than do the funds; perhaps the overweight sectors have driven the out-performance.
  3. Mutual Fund Manager skill: The mutual fund managers are likely to hold more of their favorite stocks than they hold of other stocks.  If they each have a few good ideas, then I am taking advantage of those good ideas by selecting my portfolios from the mangers' top five holding.  The high diversification of the mutual funds keeps mutual fund shareholders from fully benefiting from their managers' skill.

Below, I've graphed the performance of the "Winner" and "Loser" portfolios against several possible benchmarks: the blended performance of the mutual funds, the S&P 500 index, and five green energy ETFs (ICLN, QCLN, PBW, PBD, and GEX.)  Since the ETFs each track a difference index for the Cleantech sector, it's reasonable to assume that they represent the performance of the average Cleantech stock.

 winnerslosers.GIF

This promises to be a fairly long investigation, so I plan to break it up into a series that I'll publish over the next few days.  I'll add links to the articles here as I publish them.  The first one, in which I look into my "Higher Beta" hypothesis, will be published here shortly.

It could turn out that none of my hypotheses explain the out-performance we've seen.  In that case, it could be luck, or it could be something I have not thought of.  

Easy Green Money... Too Good to be True?

I'm hoping that I find some evidence for mutual fund manager skill.  To do that, I'll need to eliminate the other possibilities. If I can, we can expect this method to produce out-performance in the future, and under any market condition.  In other words, my attempt at a tracking portfolio might just be a better way to play green stocks.  An easy way to play green energy, without having to pay high fees?  It sounds to good to be true, but in the wild west of green energy investing, in might last for a year or two.

What do you think?  Is there  something else I should investigate?  If so, please leave your suggestion in the comments.

DISCLOSURE: Tom Konrad and/or his clients own LXU, ELON, and AMSC. The Guinness Atkinson Fund is an advertiser on his website, AltEnergyStocks.com

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.

 

September 20, 2009

Book Review: Investment Opportunities for a Low Carbon World (Cleantech Indexes, Funds and ETFs)

Charles Morand

This is the third installment of my review of the book book "Investment Opportunities for a Low Carbon World". The second installment covered geothermal power and energy efficiency and the first installment covered wind and solar.

This post reviews three interrelated chapters on the world of cleantech and alt energy indices, funds and ETFs. Two of these three chapters are my favorite in the book so far -  they provide very useful information for the novice investor with an interest in alt energy investing but limited time and knowledge for successful stock picking. 

Cleantech and alt energy are challenging sectors to invest for several reasons: (1) pure-plays tend to be risky investments because substantial technology and business risks often exist; (2) when pure-plays are not so risky (i.e. wind power), stocks tend to trade at outrageous multiples, with several years of strong growth already fully priced in; (3) the stocks of non-pure plays with some exposure to alt energy trade, more often than not, based on what happens in other parts of the company, requiring investors to own businesses they might have little interest in or understanding of (e.g. General Electric (GE) and Siemens (S)).        

The alternative to equities is to invest in one of the alternative energy and cleantech ETFs (either long or short) or purchase one of the alt energy mutual funds. I generally believe the latter option to be less desirable than the former, mostly because of high expense ratios and other fees. ETFs, in my view, provide an excellent way for retail investors to gain exposure to the sector - although overpricing and volatility issues still exist, firm-level risk is eliminated and risk is spread over a large number of securities at a relatively low cost.

Measuring the Performance of Environmental Technology Companies

David Harris, FTSE Group

This chapter provides an introduction to cleantech and alt energy stock indices. Early on in the chapter, the author notes:

"Active managers claim they can identify those companies with above market average growth potential, but at this stage in the sector's evolution it is impossible to know which environmental technology companies will be the winners"

While I don't think this assessment applies equally to all sub-sectors of the environmental technology market, this statement still sums up relatively well the landscape for most retail investors and, as mentioned above, provides a strong argument for index-based investing.  

The chapter then moves on to provide a methodology for breaking down the environmental technology sector into sub-sectors, based on the approach used by FTSE in making its Environmental Technology Index Series. It then lists out the main environmental technology indices available and their key characteristics.

Overall, this is a useful chapter for investors in understanding how index makers approach the process of index creation. Since indices form the backbone of ETFs and are the single most critical determinant of ETFs' relative performance, this is a process worth understanding. However, the author could have provided more technical information to increase the chapter's usefulness to investors with an intermediate level of knowledge.

Investment Approaches and Products for Investors

Clare Brook, WHEB Asset Management

This chapter provides a review of the following investment vehicles: socially responsible (SRI)/ethical funds, cleantech mutual funds, private equity cleantech funds and environmental hedge funds.

We learn that the largest holdings in most ethical/SRI funds are often in industries unrelated to environmental tech such as financial services. That is because such funds, unlike cleantech and alt energy mutual funds, do not invest in anything specific - they merely avoid investing in companies and industries that violate pre-determined ethical standards. For cleantech investors, those funds are generally useless.

As far as real cleantech and alt energy mutual funds go, the author discusses the problem of over-valuation mentioned above - in her view, valuations often reflect more a scarcity of investment options in pure-play cleantech stocks than realistic expectations for future growth.

The criteria provided by the author to evaluate different investment options are the most part of this chapter. The one thing that the author stresses across different actively-managed investment products is the quality of the management team, its experience and its track record. I would tend to agree - if someone decides to invest in mutual funds, these factors should arguably weigh more than the expense ratio, as they help put the expense ratio into perspective.

Exchange Traded Funds as an Investment Approach

Lillian Goldthwaite, Friends Provident  

This chapter provides a detailed overview of ETFs and makes the case well for using them in a portfolio. I particularly liked this chapter.

According to the author, some of the main strengths of ETFs are: they are traded on exchanges and can be bought and sold (and priced) throughout the day; they can be sold short, bought on margin and loaned; the portfolio can be viewed in its entirety at all times and the index construction process is transparent; and the process by which institutional investors can acquire and redeem shares by trading in the stocks of companies in the index ensures that no sizable gap emerges between net asset value and portfolio value.

As with the previous chapter, the author provides a checklist of items to research when doing the due diligence on an ETF. The chapter concludes with a list of ETFs in cleantech and alt energy, but also in nuclear energy, carbon emissions, timber and water.

The author does not delve particularly deep into cleantech  per se, keeping the discussion focused instead on ETFs more generally. 

Overall, I found this chapter interesting and quite useful. As is the case with the preceding two, there is less to say about this chapter than there was about the ones on environmental technologies that I reviewed in the first couple of installments, mostly because these chapters are shorter.

The more seasoned investor is unlikely to learn much from this section of the book. But so it goes for such books in general; they are ideally suited for novice investors who want to get started investing into the sector and want a framework to approach the process.

For those interested in cleantech and alt energy ETFs, the following articles might be of interest:

Wind
Solar
General alt energy and cleantech 
Carbon emissions   

DISCLOSURE: None 

* We are always interested in reviewing books and reports in the areas of alternative energy, cleantech or other environmental industries, especially where they add value to the investment decision-making process. If your organization would like a new book or report reviewed, please contact us

August 27, 2009

Vacation, Updated Graphs, and 2 Conferences

Vacation and Meet Me at the Colorado Renewable Energy Conference or the International Peak Oil Conference.

I'm on vacation this week, so I'm going to leave you with a preview from a presentation I will be giving at the Colorado Renewable Energy Conference on Aug 29 in Golden Colorado. I'm updating my Investing in Renewable Energy presentations, and I've been able to incorporate a lot of the work Charles and I did on clean energy mutual funds and ETFs since January this year.

ETF Holdings Revealed

Charles did some in-depth work looking at the holdings of the ETFs this spring, and I turned it into this graph (click for the high-res version):

Looking at the holdings data, I've changed my favorite clean Energy ETF to QCLN, since it has a moderate expense ratio, and has more exposure to some of my favorite Clean Energy subsectors: Energy Efficiency, Clean Transport, Batteries/Electricity Storage, and Geothermal than my previous favorite, ICLN, which I picked mainly because of the expense ratio.  However, I think QCLN underweights clean transport and wind more than I would like, so another good option for larger portfolios would be a portfolio of 80% QCLN and 10% each of FAN and PTRP.  I prefer FAN to PWND because FAN is more focused on the wind supply chain, while PWND has more of a focus on wind park operators (Power Production.)

Evidence of a Clean Energy Fund Bubble

I also updated my chart of the number of clean energy mutual funds from March to reflect the closure of the Airshares EU Carbon Allowances Fund (ASO):

 nofunds.bmp

If that does not look like a bubble (in clean energy funds) I don't know what does.  It just goes to show that solid fundamentals do not prevent bubbles... solid fundamentals are often the foundation on which bubbles build their castles in the sky, to mix a metaphor.  However, if you do have solid fundamentals (as I believe clean energy does) the popping of the bubble just sets the stage for years of healthy growth. 

Presentations on Stock Picking

That's not the core of the presentation, but I like to cover mutual funds and ETFs when talking to a general audience of Alt Energy enthusiasts.  The real meat of the presentation, for me, is picking clean energy stocks.  For that, you'll need to wait for future articles, or come to my presentation at CREC, or the Saturday, October 10 workshop "Survive and Thrive After Peak Oil: Creating Personal Plans for the Coming Decades" at the ASPO 2009 International Peak Oil Conference, October 10-13 in Denver, CO.

At the ASPO conference, I'll skip the mutual fund stuff altogether, and spend more time on the how-to's of stock-picking.  

DISCLOSURE: None.

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.

 

July 22, 2009

Carbon ETFs/ETNs: Playing Copenhagen

Charles Morand

At $126 billion transacted in 2008, up from $11 billion in 2005, the global carbon market is the fastest growing commodities market in the world and, provided that an agreement is reached at the COP15 conference in Copenhagen and that the US adopts a cap-and-trade program, this growth could go on for several more years.

Yet this is a market that remains comparatively unknown for a number of reasons, not the least of which is the fact that the rules surrounding it are very complex. Unlike other commodities, to successfully invest directly in carbon assets one must have a complete understanding of various layers of rules and regulations, starting at the top with broad public policy objectives all the way down to the minutiae of how carbon assets can be traded.    

 In early May, I wrote an article discussing how US investors could invest in emissions trading. In that article, I mostly ignored the iPath Global Carbon ETN (GRN) and the AirShares EU Allowances Fund (ASO) - the two ETF/ETNs that track European carbon prices - because the article focused on US carbon emissions and neither has exposure to US emissions markets such as the RGGI or the CCX.

These two products, launched in the past year, provide investors with direct exposure to carbon contracts. In a way, they are a much more direct means of expressing one's view on the carbon market than going through the back door by owning an exchange such as Climate Exchange PLC (CXCHY.PK) or a trading platform like World Energy (XWES).

Although I first discussed GRN and ASO in early January, I never researched either of them in any detail. Yesterday, I looked into how they had been performing in 2009. The graph below shows their performance over the past six months.

            
What accounts for GRN's seeming outperformance (I haven't checked for statistical significance) is the composition of the underlying portfolio of carbon assets. The following table provides a summary of the main carbon assets traded around the world (for a larger table, you can download the Barclays Capital report from which I took it and scroll to page 4).



Currently, the most liquid and active carbon markets are for the EU ETS' EUAs and secondary CERs (see table above). I will not cover the rules of the EU ETS in this article, but you can find a detailed overview of the program here. In 2008, out of a total of about $126 billion transacted on international carbon markets, EUAs accounted for $92 billion and secondary CERs $26 billion - together, they made up roughly 94% of transacted value.

EUAs must be surrendered to governments by regulated companies each year in an amount equivalent to the company's emissions. CERs can also be used toward meeting regulatory requirements, although their use is capped at 13.5% of total  permit requirements in the EU ETS (this varies by country). CERs thus tend to trade at a discount to EUAs even though the marginal cost of abatement might be lower in the emerging economies where they are generated.

GRN Vs. ASO  

Although they both hold carbon futures contracts transacted on the European Climate Exchange, GRN and ASO are set-up very differently.

ASO, according to information available on its website, holds a basket of EUA futures of different vintages - that is, of different compliance years - that is rolled over annually. You can view the current portfolio here. ASO holds the futures until  shortly before the EUAs come due in December of each year, at which time it sells them and uses the proceeds to invest "in futures contracts expiring in December of the next five subsequent years [...]" Since ASO is not a regulated entity under the EU ETS, there is no sense in the fund taking physical delivery of the EUAs.

GRN, on the other hand, holds a basket of EUA (~79%) and CER (~21%) futures. The weights are determined annually by a committee and the index is re-weighted in November of each year. The other major - and, arguably, more important - difference with ASO is the fact that GRN holds only current year contracts. When it is re-weighted each November, the futures for period T (current year) are thus entirely replaced with futures for period T+1.  

GRN is heavily leveraged to near-term market developments, whereas ASO takes a longer-term view.

Conclusion

Because ASO looks five years out, a strong agreement in Copenhagen  in December would be favorable for the fund, as the EU has indicated that it would raise its greenhouse gas reduction target from 20% below 1990 level by 2020 to 30% below 1990 by 2020 if such an agreement were reached. The 2013 futures then held by ASO following the annual roll would most likely experience a pop.

Additionally, if the US were to join the carbon trading club by the end of the year, the long-term picture would brighten substantially, which again might favor ASO.

Besides these macro events, I don't currently have a view on which security is superior as I haven't done sufficient analysis of the EU ETS yet. This is something I intend to do in the next few weeks and months, as I think interest in this commodity will grow substantially in the lead-up to Copenhagen.

DISCLOSURE: None            


       

UPDATE (JULY 28, 2009): A reader alerted me to this: http://www.indexuniverse.com/sections/newsinfocus/6256-xshares-to-close-carbon-etf-.html - ASO has now been withdrawn. Not especially surprising in my opinion.
 

June 29, 2009

What's Next For The US Natural Gas Fund (UNG)?

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
               

May 25, 2009

Not All Alt Energy ETFs Were Created Equal

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

March 28, 2009

Do You Need To Invest In Oil To Benefit From Expensive Oil?

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.

March 24, 2009

A Diamond In The Mutual Fund Rough

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.

March 18, 2009

If a Clean Energy Mutual Fund Falls in the Forest...

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:

funds over time 2.bmp

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.

March 04, 2009

Costs of Green Stocks vs Costs of Green Funds

Tom Konrad, Ph.D.

funds over time.bmpThe 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.  Many brokers offer much better commissions, which make stocks look even better in comparison to funds.

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
cost over time.bmp

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.)

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.

 

February 23, 2009

Renewable and Alternative Energy Mutual Funds Compared

UPDATE 3/4/2011: An up-to-date article on selecting green mutual funds and ETFs can be found here.

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.  

 expense ratios.bmp

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.mutual fund breakdown.bmp

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.

February 11, 2009

UltraPromises Fall Short

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.

January 27, 2009

Options on Clean Energy ETFs

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.

January 20, 2009

Alternative Energy Exchange Traded Funds (ETFs)

UPDATE 3/4/2011: An up-to-date article on selecting renewable energy ETFs can be found here.

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.

December 28, 2008

Clean Energy Mutual Funds and ETFs: Does Active Management Pay?

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.

December 23, 2008

Solar Stocks As the Best Play On The Cleantech Revolution? (Part II)

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.

August 21, 2008

Wind Energy ETFs: A Comparison

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.

July 20, 2008

Clean Energy Mutual Funds and ETFs

UPDATE 3/4/2011: An up-to-date article on selecting green mutual funds and ETFs can be found 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.

June 29, 2008

New Wind ETF FAN Cools Off Sunburned Portfolios

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.

October 07, 2007

Investing In Renewable Energy 101

UPDATE 3/4/2011: An up-to date article on selecting green mutual funds and ETFs can be found here.
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" »

July 18, 2007

Alternative Energy ETFs - A Good Way To Invest in a Booming Sector

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.

June 10, 2007

Introduction to Investing in Renewable Energy

UPDATE 3/4/2011: An up-to date article on selecting green mutual funds and ETFs can be found here.

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.

 

April 22, 2007

Alternative Energy Mutual Funds and Exchange Traded Funds (ETFs)

UPDATE 3/4/2011: An up-to date article on selecting green mutual funds and ETFs can be found 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.

November 23, 2005

Calpine Gets Hammered

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.

November 16, 2005

Endesa Reports 52 Percent Rise in Profit

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.

Shares of Mechanical Technology and Medis Technology Purchased

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.

MDTL_20051116.png

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.

MKTY_20051116.png

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.

November 15, 2005

Shares of Capstone Rising

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.

November 11, 2005

Shares in Altair Nanotechnologies Purchased

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.

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.

November 10, 2005

Fuel Cell Companies Purchased for Portfolio

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.

fuelcells_20051110.gif

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.

November 04, 2005

Shares in Capstone Purchased

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.

October 04, 2005

Shares in Scottish Power and Endesa Purchased

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.

September 26, 2005

Shares of IDA Corp. Purchased

idacorp_logo.gif 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.

ida_20050926.gif

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.

September 20, 2005

Shares in Active Power Purchased

acwp_logo.gif
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 CoolAirTM 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.

acpw_20050920.gif

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.

September 15, 2005

Shares in FPL and Calpine Purchased

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.

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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.

September 13, 2005

Shares in Energy Conversion Devices Purchased

ecd_logo.gifEnergy 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.

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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.

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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.

September 09, 2005

Shares of Daystar Technologies Purchased

dsti_logo.jpgDayStar 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.

Shares of Hydrogenics Purchased

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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.

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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.

September 08, 2005

Virtual Mutual Fund at Marketocracy.com

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.

September 10, 2004

First Alternative Energy Index Spawns Exchange Traded Fund

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.


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