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Investing in Clean Energy with ETFs

Investment case

The rising cost of existing energy sources combined with the growing environmental - global warming movement create increasing demand for clean energy.

According to the National Renewable Energy Lab, demand for renewable energy will continue to outstrip supply for the foreseeable future, despite projected capacity growth from 30 million MWh in 2006 to 85 million MWh by 2010.

One of the key drivers of demand is the fact that 25 states plus the District of Columbia have enacted renewable portfolio standards (RPS) requirements ranging from 2% to 30% of total electricity supply, to be achieved over the next five to 15 years.

At the same time, global demand for renewable energy equipment is already leading to supply shortages for wind turbines and photovoltaic modules.

Renewable Energy Basics

from National Renewable Energy Lab

The United States currently relies heavily on coal, oil, and natural gas for its energy. Fossil fuels are nonrenewable, that is, they draw on finite resources that will eventually dwindle, becoming too expensive or too environmentally damaging to retrieve. In contrast, renewable energy resources—such as wind and solar energy—are constantly replenished and will never run out.

Solar

Most renewable energy comes either directly or indirectly from the sun. Sunlight, or solar energy, can be used directly for heating and lighting homes and other buildings, for generating electricity, and for hot water heating, solar cooling, and a variety of commercial and industrial uses.

Wind

The sun's heat also drives the winds, whose energy is captured with wind turbines. Then, the winds and the sun's heat cause water to evaporate. When this water vapor turns into rain or snow and flows downhill into rivers or streams, its energy can be captured using hydropower.

Biomass

Along with the rain and snow, sunlight causes plants to grow. The organic matter that makes up those plants is known as biomass. Biomass can be used to produce electricity, transportation fuels, or chemicals. The use of biomass for any of these purposes is called biomass energy.

Hydrogen

Hydrogen also can be found in many organic compounds, as well as water. It's the most abundant element on the Earth. But it doesn't occur naturally as a gas. It's always combined with other elements, such as with oxygen to make water. Once separated from another element, hydrogen can be burned as a fuel or converted into electricity.

Geothermal

Not all renewable energy resources come from the sun. Geothermal energy taps the Earth's internal heat for a variety of uses, including electric power production, and the heating and cooling of buildings. And the energy of the ocean's tides comes from the gravitational pull of the moon and the sun upon the Earth.

Ocean

The ocean can produce thermal energy from the sun's heat and mechanical energy from the tides and waves. NREL does not conduct research in ocean thermal energy or ocean mechanical energy. See the U.S. Department of Energy's Consumer Guide Web site for basic information ocean energy.

Hydropower

Flowing water creates energy that can be captured and turned into electricity. This is called hydroelectric power or hydropower. NREL doesn't perform any research in hydroelectric power technologies. For more information on hydroelectric power, see the Hydropower Basics from the U.S. Department of Energy's Wind and Hydropower Technologies Program.

Overview

There are several ways to invest in clean energy with exchange traded funds.

The largest of the group is the $1.6 billion PowerShares WilderHill Clean Energy Portfolio (PBW) which tracks an index 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.

Top holdings as of July 31 include Fuel Systems Solutions Inc. (FSYS), VeraSun Energy Corp. (VSE), FuelCell Energy Inc. (FCEL) and ReneSola Ltd (SOL).

PowerShares also offers the Global Clean Energy Portfolio (PBD) which is composed of companies that focus on greener and generally renewable sources of energy and technologies facilitating cleaner energy.

Van Eck sponors the Global Alternative Energy ETF (GEX) which owns 30 stocks with the highest average trading volume and market capitalization and are "principally engaged" in the business of alternative energy.

The modified equal weighted portfolio is rebalanced and reconstituted quarterly.

Top holdings French wind power plant constructor Theolia S.A., Irish insulation company Kingspan Group PLC, Danish wind power company Vestas Wind Systems A/S and French renewable electricy utility EDF Energies Nouvelles S.A.

The First Trust ISE Global Wind Energy Index Fund (FAN) owns publicly traded companies throughout the world that are active in the wind energy industry. The PowerShares Global Wind Energy Portfolio (PWND) invests in global companies engaged in the wind energy industry, which are primarily manufacturers, developers, distributors, installers and users of energy derived from wind sources.

The Claymore/MAC Global Solar Energy Index ETF (TAN) tracks an index of companies involved in various aspects of the solar industry.

Another solar play is Van Eck Global's Market Vectors Solar Energy ETF (KWT).

The Powershares Global Nuclear Energy Portfolio (PKN) invests in companies which are engaged in the nuclear energy industry with representation across reactors, utilities, construction, technology, equipment, service providers and fuels.

The PowerShares WilderHill Progressive Energy Portfolio (PUW) invests in U.S.-listed companies that are significantly involved in transitional energy bridge technologies, with an emphasis on improving the use of fossil fuels.

Top Performers

Largest

1. PowerShares WilderHill Clean Energy Portfolio (PBW)- $1,584 million
2. Global Clean Energy Portfolio (PBD) - $221 miillion

Lowest Cost

1. First Trust ISE Global Wind Energy Index Fund (FAN) - 0.60%
2. PowerShares WilderHill Clean Energy Portfolio (PBW) - 0.70%

ETFs to show per page:
ETF Name Ticker Asset Class Yield Size ($MM) Expense Ratio (%) Sponsor
ETF Name Ticker Asset Class Yield Size ($MM) Expense Ratio (%) Sponsor
First Trust ISE Global Wind Energy Index Fund FAN Equities 0.6 74 0.60 First Trust
Nasdaq Clean Edge Smart Grid Infrastructure Index Fund GRID Equities 0.0 30 0.70 First Trust
Nasdaq Clean Edge US Liquid Series QCLN Equities 0.0 39 0.60 First Trust
Claymore/MAC Global Solar Energy Index ETF TAN Equities 0.1 222 0.65 Guggenheim
S&P Global Clean Energy Index Fund ICLN Equity 0.8 79 0.48 iShares
S&P Global Nuclear Energy Index Fund NUCL Equity 1.6 18 0.48 iShares
Global Clean Energy Portfolio PBD Equities 0.0 212 0.75 PowerShares
PowerShares WilderHill Clean Energy Portfolio PBW Equities 0.0 541 0.70 PowerShares
Global Nuclear Energy Portfolio PKN Equities 2.5 31 0.75 PowerShares
PowerShares WilderHill Progressive Energy Portfolio PUW Equities 0.5 75 0.73 PowerShares
PowerShares Global Wind Energy Portfolio PWND Equities 0.0 29 0.75 PowerShares
Cleantech Portfolio PZD Equities 0.2 163 0.71 PowerShares
Global Alternative Energy ETF GEX Equities 0.6 164 0.65 Van Eck Global
Market Vectors Solar Energy ETF KWT Equities 0.0 45 0.65 Van Eck Global
Uranium + Nuclear Energy ETF NLR Equities 0.0 187 0.62 Van Eck Global

Executive Summary:

  • Demand driven by high oil prices, environmental concerns and government regulation.
  • Competing alternative energy solutions and evolving technologies create several investment opportunities.
  • Ways to invest with ETFs:

Clean energy portfolio: PBW, PBD, GEX

Wind: FAN, PWND

Nuclear: PKN

Solar: TAN, KWT

Progressive (bridge technologies): PUW

  • Another option is to go with a socially responsible investing ETF.


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