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Behind the Surge in the Wind Power ETF

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Renewable sources of energy are fast gaining traction, especially with concerns over pollution and carbon emissions. The world is slowly shifting towards clean energy sources like solar energy, hydro-power, wind power and clean burning natural gas.

Wind energy has gained popularity due to the fact that it supplies clean energy without harming the environment unlike fossil fuels. Though wind turbines are considered costly investments, it uses little land and can be widely distributed and is growing rapidly at more than 25% per annum.  

Adoption of wind energy technique provides multiple benefits: The land owners benefit from wind farming as they get good compensation for leasing their land; the company benefits from government subsidies; the environment benefits due to zero-carbon emission; and the society and economy benefit at large.

The U.S. Energy Information Administration (EIA) estimates that by 2040, renewable sources of energy except hydropower will account for 32% of the overall growth in electricity generation. Capital-cost reductions in wind energy (13%) and government support have given a boost to this important resource (read Alternative Energy Stock Outlook - June 2013).

In fact, a research by Bloomberg New Energy Finance (BNEF) predicts that wind and solar will take up the largest shares of new power capacity added in terms of GW by 2030, accounting for 30% and 24% respectively. By 2030, renewable technologies will account for 50% of new power generation capacity installed around the world.

Investor plays

Investors have been betting on clean energy ETFs for years with disappointing results across the board. Many funds in this space have lost in the double digits -- if not worse-- in years past, as a reduction in government subsidies, low prices for traditional fuel sources, and a general lack demand for these risky companies have combined to dull the investment case for alternative energy ETFs.

Despite all odds, the good news is that investors have seen a bit of a reversal in the clean energy segment so far in 2013. Almost all the stocks in the segment have had a good performance this year, thanks to a growing population, economic growth and better regulations in place which have acted as catalysts to the clean energy sector (see Clean Energy ETFs: The Real Bull Market?).

Wind ETF in focus

Interestingly, recent investor interest in the clean energy space has largely been directed to wind energy ETF. In spite of the fact that the clean energy sector has suffered setbacks over years, this is now an ideal time to invest in this space. Investors who wish a pure play in this challenging and emerging wind energy space, the only available option is reviewed in greater below.

First Trust ISE Global Wind Energy Index Fund (FAN)

Launched in June 2008, FAN is a passively managed fund and is the only option available for investors seeking to play in the wind energy space. The fund tracks the ISE Global Wind Energy Index.

The ETF currently holds 51 securities in its basket and mostly comprised of international stocks with European companies taking about two-thirds of the exposure. From a market cap look, it is pretty even among large mid and small caps, although there is definitely a small cap bias in this product.

The ETF is heavily concentrated in its top 10 holdings into which it puts more than 60% of the total assets. Hence, the returns of the fund are largely dependent on the performance of these securities. Vestas Wind Systems, Gamesa Corporacion Tecnologica, S.A. and China Longyuan Power Group-H are its top three holdings which jointly contribute 22% to the fund (also see Go Green with These 3 Clean Energy ETFs).

Sector-wise, utilities take the top spot, followed by industrials and energy. The top 3 country holdings for the product include Spain, Germany and U.S. which combine to contribute 48% of the fund’s assets.

FAN trades roughly 30,000 shares a day while costs come in at 60bps in fees per year. The ETF has posted solid returns of 33.81% as of June 30 for a one-year period and has given a decent dividend yield of 1.23% as well.

FAN has recently hit a 52-week high of $9.70. On July 26, FAN recorded solid inflows, suggesting that there is good investor demand for the product.

The Bottom Line

The alternative energy sector has been running like the wind, crushing the broad market in the past few months by a pretty wide margin. Given the dramatic move higher in the space, one can certainly argue that clean energy is finally in a bull market environment (read Behind the Rebound in Energy ETFs).

Current trends are in favor of the wind energy sector and we see the space nicely rebounding with good potential to outperform. It’s good to hoist your sail when the wind is fair, as the saying goes, and that definitely appears to be the case for investing in FAN right now.

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