Is Alternative Energy Dead?
By Ron DeLegge, Editor
July 17, 2009
SAN DIEGO (ETFguide.com) – On July 8th, 2008, hedge fund manager T. Boone Pickens declared to the world his plan to make the United States “energy dependent.” One year later, Pickens has seemingly changed his tune.
On July 7th, he scaled back his ambitious alternative energy plan, by rescinding support of a huge Texas wind farm.
Does this spell trouble for alternative energy sector?
Finding New Energy Sources
Renewable energy uses natural resources like sunlight, wind, rain, tides, and geothermal heat to produce energy. High oil prices, concerns about global climate change, and the U.S. government’s growing support of renewable energy through legislation has driven the push to commercialize alternative energy sources.
However, troubled credit markets along with falling natural gas prices have eliminated or stalled many alternative energy projects. Inexpensive traditional energy sources, like fossil fuels, dampers interest and demand for alternative energy.
For example, the high flying solar-power industry has experienced delays in commercial projects and job layoffs.
Many companies within the alternative energy sector are funded by venture capitalists and not yet publicly traded. The vast majority of investors will never get the opportunity to invest in venture funded start-ups and even if they could, most probably couldn’t stomach the risk.
The next best option may be exchange-traded funds (ETFs).
Even though the total number of ETFs that invest in alternative energy strategies has jumped to around 15 from just two over the past few years, the universe is still very small.
The four ETF families that offer alternative energy investments are Claymore Securities, InvescoPowersShares, First Trust Advisors, and Van Eck Global.
A number of alternative energy ETFs focus on narrow sub-sectors, while others take a more broadly diversified approach.
For solar energy stocks there’s the Claymore/MAC Global Solar Energy Index ETF (NYSEArca: TAN) and Market Vectors Solar Energy ETF (NYSEArca: KWT). For nuclear energy stocks there’s the Market Vectors Nuclear Energy ETF (NYSEArca: NLR). For wind powered stocks there’s the First Trust ISE Global Wind Energy Index Fund (NYSEArca: FAN) and the PowerShares Global Wind Energy Portfolio (NasdaqGM: PWND).
So far this year, the performance of solar stocks has been flat whereas wind stocks have jumped between 20 to 30 percent in value. Nuclear energy stocks are up almost 15 percent.
For a broader industry sector approach, see the PowerShares WilderHill Clean Energy Portfolio Fund (NYSEArca: PBW) or the PowerShares WilderHill Progressive Energy Portfolio Fund (NYSEArca: PUW). Each of these funds cover a range of emerging technologies like biofuels, wind power, hydroelectricity, geothermal power and solar energy.
Risks and Rewards
Like most emerging industries, alternative energy is volatile and littered with risks.
For instance, PBW gained 58.5 percent in 2007 but gave back 68.87 percent in 2008. Year-to-date, PBW has gained almost 15 percent. So here’s the lesson: If you decide to invest in alternative energy, don’t be naive to the volatile ups and downs.
Be aware too that most alternative energy companies have yet to turn a profit. It’s very similar to the good old days in the late 90's when many Internet startups were all promise and no profits. Some succeeded, but most failed.
Some traditional energy companies have embarked on alternative energy projects in order to stay competitive.
To that end, investing in the Select Sector Energy SPDR (NYSEArca: XLE) is another way to get exposure, albeit indirect exposure, to the wild world of alternative energy. XLE contains 40 energy stocks that inside the S&P 500 index. Top holdings include Exxon Mobil, Chevron, and Schlumberger.