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Barchart.com ETF ResearchBarchart.com's Picks in the Clean Energy Equity Sector ETF Research written by the Barchart.com ETF Research Team Last updated: January 14, 2011 Table of Contents
IntroductionThe "clean energy" or "alternative energy" sector is usually defined so as to include renewable power sources such as solar power, wind power, and geothermal power, as well as electricity sectors such as conservation, the smart grid, batteries, and storage. We will first analyze the broad clean energy ETFs that hold stocks from all the subsectors in one fund, and then we will focus on the single-sector ETFs in the solar, wind, and power sub-sectors. Broad Clean EnergyPowerShares has four different funds in the broad clean energy space, accounting for a total of nearly $1 billion in assets under management, making it the largest ETF issuer in the space by far. Van Eck is the other main player in the broad clean energy ETF space with its Market Vectors Global Alternative Energy ETF (GEX). Here is a quick description of each fund. PowerShares WilderHill Clean Energy Portfolio (PBW) (issuer web site link) – This fund, launched in March 2005, is the oldest fund in the sector and currently has $560 million in assets under management. The fund is based on the WilderHill Clean Energy Index (ECO). The fund holds 57 U.S.-listed stocks and is based on a modified equal-weighted index. The index assigns weights to clean energy categories and then equally weights the stocks within those categories (link to methodology explanation). The categories are as follows: Renewable Energy Harvesting (solar, wind, geothermal) (24% sector weight), Power Delivery & Conservation (28%), Energy Conversion (20%), Energy Storage (18%), Cleaner Fuels (5%). The fund has an expense fee of 0.60%. PowerShares Global Clean Energy Portfolio (PBD) (issuer web site link) – This fund, launched in June 2007, has $145 million in assets under management. The fund is based on the WilderHill New Energy Global Innovation Index (NEX), which is a modified equal-weighted index that holds 100 globally-listed stocks. The fund is different from PBW in that more than half of the stocks held are listed on exchanges outside the U.S., whereas PBW holds only U.S.-listed stocks. The index web site (link) lists the following sector weights: Energy Efficiency 27.55%, Solar 24.63%, Wind 19.58%, Biofuels & Biomass 10.52%, Renewables-Other (Geothermal, Marine, Hydroelectric) 9.29%, Power Storage 7.01%, Energy Conversion 1.43%. The weighting methodology involves assigning weights to each sub-sector. Then, within each subsector, the stock components are divided into large and small cap stocks and large components are assigned 3-1/2 times of the weight of small components (see link). The fund has an expense fee of 0.75%. PowerShares Cleantech Portfolio (PZD) (issuer web site link) – This fund, launched in October 2006, has $145 million in assets under management. The fund, based on the Cleantech Index, is a modified equally-weighted index that currently holds 72 globally-listed stocks. The current sector allocation for the index, according to the index provider's literature (see link), is as follows: Energy: Generation & Equipment 27.7%, Energy: Clean Fuels & Energy Storage 3.6%, Energy Transmission: Grid-level power controls, hardware, etc. 6.4%, Local Energy: Controls, efficiency products & services 13.5%, Water 10.7%, Environmental Quality 5.9%, Industrial: Clean & efficient production 14.7%, Advanced Materials 6.5%, Transport Technology 7.8%, and Agriculture & Nutrition 3.3%. This fund is broader than PBD or PBW because it includes such sectors as Water, Environmental Quality, Transport Technology, and Agriculture and Nutrition. The fund has a relatively low weight on solar of only about 10% and even less on wind. The fund has an expense fee of 0.60%. PowerShares WilderHill Progressive Energy Portfolio (PUW) (issuer web site link) – This fund, launched in October 2006, has only $60 million in assets under management. The fund is based on the WilderHill Progressive Energy Index (WHPRO), which is focused on transitional technologies that "can serve as an energy bridge improving near-term use of fossil fuel resources by progressively reducing carbon and other pollution." The fund holds 53 U.S.-listed stocks. The fund has an expense fee of 0.60%. Market Vectors Global Alternative Energy ETF (GEX) (issuer web site link) – This fund, launched in May 2007, has $134 million in assets under management. The fund is based on the Ardour Global Index. This fund has only 31 globally-listed stocks, which is less than half of its competitors. According to our calculations, the fund has about a 30% weight on solar and 23% on wind, which is higher than the other funds in its class. The index uses a modified market-cap weighting scheme that puts a particularly large weight on First Solar (9.75%), Cree (9.46%), and Vestas Wind (8.50%). The fund has a net expense fee of 0.62%. There are three other ETFs in the area of broad clean energy, but we will not discuss these in detail because their assets under management are low:
Clean Energy Sectors - SolarGuggenheim Solar ETF (TAN) (issuer web site link) – This fund, launched in April 2008, currently has $150 million in assets under management. The fund is based on the MAC Global Solar Energy Index, which is a modified market-cap weighted index of the world's largest publicly-traded solar companies. The fund has an expense fee of 0.65%. Market Vectors Solar Energy ETF (KWT) (issuer web site link) - This fund, launched in April 2008, currently has $25 million in assets under management. The fund is based on the Ardour Solar Energy Index, which is a modified market-cap weighted index of global solar companies. The fund has an net expense fee of 0.66%.Clean Energy Sectors - WindFirst Trust ISE Global Wind Energy Index Fund (FAN) (issuer web site link) – This fund, launched in June 2008, currently has $50 million in assets under management. The index uses a modified market-cap weighting scheme within two groups – a pure-play group that accounts for two-thirds of the index and a non-pure-play (conglomerate) group that accounts for one-third of the index. This scheme allows the use of a market-cap weighting scheme without conglomerates such as GE or Siemens taking over the entire weight in the index. The fund has 58 globally-listed companies. The largest holdings are Vestas Wind (7.66%), EDP Renovaveis (7.21%), Iberdrola Renovables (7.18%), China Longyuan Power Group (6.33%), Gamesa Corp (5.76%), and Repower Systems (5.30%). The fund has a net expense fee of 0.60%. PowerShares Global Wind Energy Portfolio (PWND) (issuer web site link) – This fund, launched in July 2008, currently has $25 million in assets under management. The fund is based on the NASDAQ OMX Clean Edge® Global Wind Energy Index, which holds 33 globally-listed stocks. The index uses a similar weighting scheme as FAN, except that PWND assigns a 90% weight to pure plays and a 10% weight to the non-pure-play conglomerates. This fund's top holdings are similar to FAN, except the largest companies have a higher weight than FAN because there are fewer stocks in this fund: Vestas Wind 10.8%, China Longyuan Power 10.2%, Iberdrola Renovables 9.7%, EDP Renovaveis 9.6%, Zoltek 4.9%, Nordex 4.2%. This fund has an expense fee of 0.75%.Clean Energy Sectors - Smart Grid & BatteriesFirst Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) (issuer web site link) –This fund, launched in 2009, has only about $30 million in assets under management. The largest holdings include Quanta Services, NGK Insulators, Schneider Electric SA, Red Electrica, SMA Solar Technology, and Prysmian SpA. This ETF is essentially a global electrical equipment sector ETF with a heavier weight on some of the newer-age electrical technologies such as solar inverters (SMA Solar Technology), demand response (EnerNoc), wind power electrical equipment (American Superconductor), and smart meters (Itron). The fund has an expense fee of 0.70%. Global X Lithium ETF (LIT) (issuer web site link) – This fund, launched in July 2010, has gained fairly strong traction and currently has $157 million in assets under management. This fund holds 23 stocks of companies that are involved in the mining, processing and use of lithium for various battery applications. Lithium batteries are just starting to be used in electric and hybrid vehicles, which is why lithium is considered to be in the Clean Energy sector. The fund has a heavy combined weight of 37% on the world's two largest lithium mining companies: Soc Quimica y Minera (20.14%) and FMC Corp (16.75%). The fund then spreads out the rest of the weight among a mix of other lithium mining companies and also battery companies such as A123 Systems (5.49% weight), Exide Technologies (4.96%), Saft Groupe (4.93%), GS Yuasa Corp (4.48%), Sanyo Electric (4.30%), and others. The vertical integration of the holdings list means this fund can be considered to be a hybrid between a metals/mining fund and a battery fund. The fund has an expense fee of 0.75%.
Investment ConclusionsOur pick for a broad Clean Energy sector ETF is the PowerShares Global Clean Energy Portfolio (PBD). The PowerShares WilderHill Clean Energy Portfolio (PBW) has a much larger amount of assets under management, but we chose PBD because (1) it has a better performance record than PBW (see Figure 1), and (2) PBD invests in globally-listed stocks as opposed to PBW, which invests in only U.S.-listed stocks. The clean energy industry is truly global in scope and the U.S. in general has lagged behind Europe and Asia in the clean energy business. We therefore favor global clean energy ETF funds that hold not only U.S-listed companies, but also hold clean energy companies listed in Europe and Asia.
We like our pick of PBD more than the Market Vectors Alternative Energy ETF (GEX) because PBD holds 57 stocks and is more diversified than GEX, which holds only 31 stocks. In addition, we like PBD's modified equal weighting scheme, as opposed to the modified market-cap weighting scheme used by GEX that causes the top stocks in GEX to have relatively heavy component weights of 8-9%, which is a negative from the standpoint of higher single-company risk. We do not find the PowerShares WilderHill Progressive Energy Portfolio (PUW) attractive because (1) PUW has low assets under management, (2) PUW has only U.S.-listed stocks, and (3) PUW's focus on the transitional theme of "improving the near-term use of fossil fuel resources" means that the fund holds some stocks that we don't believe should be held in a clean energy fund such as companies related to fossil fuels and nuclear power. While PBD is our pick for the Clean Energy sector, we also chose PowerShares Cleantech Portfolio (PZD) for the category of "Cleantech," which we believe is sufficiently different from "Clean Energy" to justify a separate category and a separate pick. As seen in Figure 1, PZD in the past two years has outperformed the Clean Energy ETFs of PBD and PBW. PZD has a low weight on the solar and wind sectors and instead invests in a broad range of technologies including energy efficiency and storage, water, pollution controls, and others. Investors who might be concerned about the PZD's light weighting in solar and wind could separately invest in the single-sector solar and wind ETFs to gain the desired exposure to those sectors. Figure 2: First Trust Wind ETF (FAN) vs PowerShares Wind ETF (PWND) (live chart link)
In the Solar sector, the Guggenheim Solar ETF (TAN) is the only solar ETF with an adequate level of assets under management of more than $50 million, one of our standing criteria for choosing ETFs. In the Wind sector, we like FAN better than PWND because (1) FAN has more assets under management, (2) FAN is better diversified with 58 companies as opposed to 33 for PWND, and (3) FAN has a lower expense fee of 0.60% versus 0.75% for PWND. FAN has not performed as well as PWND over the past two years, as seen in Figure 2, but FAN has outperformed PWND more recently over the past year. The First Trust NASDAQ Clean Edge Smart Grid Infrastructure ETF (GRID) has only $30 million in assets at present, which is not high enough for a recommendation. We find the Global X Lithium ETF (LIT) interesting, but we would advise caution since the lithium battery sector is very narrow and has yet to prove itself on a mass scale for the automobile industry.
From the Barchart.com/ETF Research Team Copyright© 2010 Barchart.com, Inc. All rights reserved. 330 South Wells Street, Suite 612, Chicago, Illinois 60606-7110 USA • E-mail: info@barchart.com • Website: www.barchart.com. |
