Many an environmentally conscious investor has chosen to hold clean energy ETFs through thin and thick. It's the wave of the future, they'd insist. (And perhaps they are right.)
However, if one doesn't grasp the methods for avoiding big losses, or if one fails to identify the negative earnings in the companies of certain alt energy ETFs, one puts him/her self at a distinct disadvantage. Meanwhile, creating a reliable income stream as well as achieving capital gains may be accomplished more readily in old school oil and gas.
Four years and 3 months ago, PowerShares introduced the Wilderhill Clean Energy Fund (PBW). To be completely honest, it's still one of the best in its category. (Note: There are now more than a dozen alts to the original... from progressive to global to nuclear to solar to wind to cleantech.)
Yet the realities are pretty straight-forward. The stodgy SPDR Select Energy (XLE) has a 10% total return since the PowerShares Wilderhill Clean Energy Fund (PBW) was introduced. The latter managed a loss of -35%.
Even the most ardent clean energy advocate will have a difficult time closing the performance gap between +10% and -35%. What's more, PBW is 1.75x more volatile than XLE. So you're seeing far more erratic price swings daily, without the net rewards to justify the extra risk.
Keep in mind, PBW and XLE are highly correlated. The Energy Select SPDR (XLE) may indeed rise slower than the PowerShares Wilderhill Clean Energy Fund (PBW), but both funds tend to move in the same general direction.
Obviously, past performance doesn't predict future performance. And someone with money to invest today should only concern his/her self with the fund or funds that may achieve goals going forward. Form that vantage point, green jobs may lead to green profits... and the PowerShares Wilderhill Clean Energy Fund (PBW) may be a great ETF vehicle to achieve those gains.
Nevertheless, an investor has to remember why they're even putting dollars or euros or yen into the markets. Typically, it's to create a reliable income stream, to benefit from increasing earning potential of companies via capital appreciation or some combination.
Alternative/Clean energy is a lot like the Internet in its infancy... so there aren't any dividends to distribute. What's more, earnings are extremely suspect in the early going.
On the other hand, Paul Amery at Index Universe wrote a fascinating piece on dividend trends in European markets. In fact, those dividend trends likely mirror changes in company distributions clear across developed market segments.
Of 8 DJ Stoxx super-sectors in the DJ Stoxx 600 Index, only 2 provide the cherished trait of a steadily increasing payout. They were Utilities and Energy (Oil/Gas).
There are a number of ETFs that may capture consistency of income in the utilities arena. There is the iShares S&P Global Utilities Fund (IXC), the SPDR International Utilities (IPU) and the WisdomTree International Utilities (DBU).
Ironically, however, utilities have been one of the worst performers of any economic segment in 2009. Its double-digit depreciation is severely hampering any goodwill that a 5% per annum income stream provides.
Contrast the disappointing results of utilities with International Energy. The dividend yield has shown steady growth over the previous 3 years and is currently near 5% per year. And in spite of the worldwide bear market mauling, no other economic segment offers the attractive combination of capital appreciation potential and reliable income.
International ETFs for oil/gas energy include iShares S&P Global Energy (IXC), SPDR International Energy (IPW) and WisdomTree International Energy (DKA).
If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod.
Disclosure Statement: is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.
Gary Gordon firstname.lastname@example.org