Funds, too, are mining new energy sources

By J. Alex Tarquinio
Published: October 12, 2008

EXCHANGE-TRADED funds that focus on alternative energy have proliferated in a very short time, and many of them have been mirroring the sharp swings in the oil markets.
"Essentially you are betting on which ones will get pushed around by oil prices the most," said Jeff Tjornehoj, a senior research analyst at Lipper.
Morningstar tracks three traditional mutual funds that focus on alternative energy — from the Calvert, Guinness Atkinson and Firsthand fund companies — but there are at least 16 ETF's that also focus on new power sources. And more than half of those ETF's were created this year.
Many of these ETF's focus on a narrow sliver of the industry, like solar or nuclear power or biofuels like ethanol. "I don't know of any mutual funds that are that granular yet," said Michael Herbst, lead natural-resources mutual fund analyst at Morningstar.
Tjornehoj said that over the long haul, alternative energy "might very well be the next big thing." But he added that this was still a fledgling industry and advised individual investors to proceed with caution. "It could be a long time before any one of these technologies replaces oil," he said.

The price of oil, meanwhile, has an outsize influence on the pricing of the alternative energy sector.
"Obviously, people aren't going to care as much about clean energy if oil is $10 a barrel," said Ed McRedmond, the senior vice president for portfolio strategies at Invesco PowerShares Capital Management, a large ETF company based in Wheaton, Illinois.
Paul Justice, ETF fund strategist at Morningstar, said he was concerned that many individual investors lacked the expertise to decide which technology might become dominant — like solar or wind power — and that it might even be one that didn't yet have a lot of publicly traded stocks, like geothermal or tidal energy.
But Justice said he could understand the popularity of one particular new flavor of ETF: wind power funds, which track wind power companies around the world. Two of these opened in the last four months and have garnered $83 million in assets between them.
Justice points out that many wind power companies — unlike solar power and ethanol businesses — are based in Europe, and that it is not always easy for Americans to buy their shares. "You don't want to own the second fiddle just because it's based in the United States," he said.
As the initial cash was pouring in, their share prices slumped, mimicking oil prices, which were also falling. The First Trust ISE Global Wind Energy Index fund has amassed more than $63 million in assets since it began trading in mid-June. As of Thursday, the shares of this ETF, which charges annual expenses of 0.6 percent, were down almost 55 percent since its inception.
PowerShares started the other wind power ETF over the summer. The fund, the PowerShares Global Wind Energy Portfolio, began trading in July, and has more than $20 million in assets. Through Thursday, the fund was down more than 51 percent; it charges 0.75 percent in annual expenses.
Three ETF's that focus on nuclear power have attracted more than $200 million in total assets since the first of them, Van Eck Nuclear Energy, began trading just over a year ago. In the third quarter, the fund was down 34 percent, and it has shed more than 52 percent from its inception in August 2007 through Thursday. It charges 0.65 percent in annual expenses.
Justice included the three nuclear power funds among the 16 alternative energy ETF's that he counted in the Morningstar database, though he acknowledged that nuclear power stocks might not be too appetizing to some alternative-energy investors.
He said these people might be drawn more to the PowerShares ETF's that track indexes created by WilderShares, a company based in Encinitas, California. WilderShares excludes nuclear power companies from its indexes.
One unusual facet of the indexes, which are called WilderHill indexes, is the way they weight companies based on how important alternative energy is to each of them.
For example, Robert Wilder, the company's founder and CEO, said a small, pure-play alternative energy stock like VeraSun Energy, an ethanol company in Sioux Falls, South Dakota, might have a bigger place in a WilderHill index than a large industrial company like Applied Materials, for which solar components are one part of its product mix.