Here Is A Closer Look At Alternative Energy ETF’s

technical-lookJulian Murdoch from Hard Assets Investor put together a great article on alternative energy ETF’s, which is worth a look:

TAN Vs. KWT: Solar ETFs Side By Side

Is the future sunny? On the opening day of the global climate summit, the market seemed to think so. Both the Claymore/MAC Global Solar Energy Index ETF (NYSE Arca: TAN) and the Market Vectors Solar Energy ETF (NYSE Arca: KWT) rose over 3 percent on Monday.

The two ETFs are very similar: Both have the same expense ratio (0.65 percent) and share the same companies in their top 10 holdings, differing only in the weighting. But year-to-date, TAN is looking better – and not just because of its cute ticker symbol:

 tan-vs-kwt_v1

 

That’s because TAN’s holdings are a bit more diverse, with its top 10 companies accounting for 56 percent of the fund’s assets, as of Dec. 9. KWT, on the other hand, has a full 66 percent of its holdings in those top 10 companies. If the funds’ underlying stocks had outperformed this year, you’d expect KWT’s higher concentration in them to drive the fund to greater returns – but unfortunately, between the lingering financial crises and falling oil prices, solar energy had a rough 2009. And while some, such as Mark Pinto, chief technology officer and general manager of Applied Material’s Energy and Environmental Solutions group, see the solar energy industry recovering over the next two years, solar hasn’t exactly been a hot spot for alternative energy investors.

Therefore, TAN’s diversity has paid off with substantially higher returns: The fund is now up 13 percent year-to-date, while KWT’s has only returned 5.93 percent. Flows for TAN have also been good, with $68 million in net inflows year-to-date, as of Nov. 30; the fund’s assets are now up to $182 million. KWT, in contrast, has attracted much less attention, with only $12 million in net inflows for the year; the fund now has $30 million in assets.

Comparing Wind ETFs

But the real action for alt-energy investors has been in the wind sector. Both ETFs involved in the wind sector have posted good returns for 2009; the First Trust ISE Global Wind Energy ETF (NYSE Arca: FAN) has risen 22.83 percent year-to-date, while the PowerShares Global Wind Energy ETF (NasdaqGM: PWND) has done even better, increasing 33.08 percent.

 fan-vs-pwnd_v1

 

As with (TAN) and (KWT), these two ETFs may seem very similar on the outside, but subtle differences in the holdings account for the discrepancy in returns:

 

Sector FAN PWND
Consumer Discretionary 0.70% 0%
Consumer Staples 0% 2.85%
Energy 5.93% 1.61%
Industrials 43.24% 49.76%
Materials 1.21% 2.11%
Utilities 48.78% 43.68%
Other 0.14% 0%
     
Top 10 Countries FAN PWND
Spain 25.24% 22.66%
United States 17.42% 8.99%
Germany 14.71% 12.16%
Denmark 8.05% 10.67%
Australia 6.15% 3.85%
Belgium 4.49% 3.48%
United Kingdom 4.47%  
France 3.95% 16.02%
Japan 3.49% 6.91%
Guernsey 2.33%  
China   4.73%
Hong Kong   2.85%

 

Unlike FAN, PWND has a higher weighting in China, which allows the fund to benefit from the country’s recent stimulus package that invested heavily in infrastructure upgrades, such as electrical transmission lines. In particular, the China High Speed Transmission Equipment Group (HK: 0658) makes up 4.73 percent of PWND’s assets, and only 0.99 percent of FAN’s, which, given that the company is up almost 95 percent in 2009, makes a difference.

Furthermore, PWND’s lower exposure to the U.S. dollar could only have helped its returns in a year when the greenback has fallen 7 percent year-to-date (as measured by the U.S. Dollar Index).

With its higher concentration in European countries, (PWND) is better positioned than (FAN) to take advantage of one of the early pledges of Copenhagen: the creation of a “super grid” in the North Sea to develop and distribute wind power. Should it come to pass, such an effort would likely rely more heavily on the Danes and the French than it would on the Americans, making FAN’s 17.42 percent weighting in the U.S. irrelevant.

Thinking Broadly

Looking at narrowly focused ETFs is relatively simple, given that there just aren’t that many to choose from. But it’s another can of worms entirely when you widen your search to ETFs that provide a broader exposure to the alt-energy sector. You can soon find yourself staring into an alphabet soup of “alternative energy” and “cleantech” stocks: (GEX), (ICLN), (PBD), (PBW), (PZD), (QCLN) … the list goes on. But even though it sounds like they might all be focused on similar companies, the range of year-to-date returns (in the above list, 5.7 percent to 36.1 percent) shows just how little you can learn from a name.

Let’s consider two broad-sector funds: the iShares S&P Global Clean Energy Index Fund (NasdaqGM: ICLN) and First Trust NASDAQ Clean Edge Green Energy Index Fund (NasdaqGM: QCLN):

 qcln-vs-icln_v11

 

Before July, the two similar-sounding funds with near-identical tickers were moving in tandem, but by August, (ICLN) had fallen, while QCLN continued up. What happened?

As before, it comes back to individual holdings. QCLN holds 50 U.S. companies involved in manufacturing, development, distribution and installation of clean energy technologies, ranging from First Solar (8.11 percent of assets) to Ultralife Batteries, Inc. (0.12 percent). Its top 10 holdings include such familiars as the aforementioned First Solar, National Semiconductor Corp, Cree Inc. and Suntech Power Holdings.

In particular, Cree Inc. has helped boost QCLN, with its whopping 218 percent return year-to-date. The company manufactures semiconductor materials, power-switching devices and wireless devices – and LED lighting, which has recently gained it the most attention.

ICLN, on the other hand, tracks the S&P Global Clean Energy Index, which is heavily weighted in the electrical equipment sector (52.60 percent) and independent power producers and energy traders (23.38 percent). Its holdings include companies from 10 countries, with companies from the U.S. and China making up 44.6 percent of the fund’s holdings.

It’s under the hood that the huge differences between the funds show up. Although ICLN’s top 10 holdings boast a few of the same names as QCLN, the fund is decidedly an electricity play, heavily invested in mature solar, wind and generation technologies. (QCLN), by contrast, has much more interesting tech plays, like Cree, particularly in companies focused on energy efficiency and batteries.

Copenhagen Effect

The lesson here is clear: When comparing niche ETFs, always, always look under the hood and kick the tires.

If strong mandates come out of the climate summit, it is a good bet that any (or all) of the ETFs discussed above will benefit, as countries will be forced to put more investment into alternative energies But when investing in clean energy ETFs, remember: Ultimately it’s the individual companies that get the checks. Therefore, picking an ETF with the right exposure is the difference between catching the wave and missing the boat.

 

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