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Alternative Energy ETF Investing 101

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President Obama’s latest attempt to crack down on carbon emissions will likely prove to be beneficial for renewable energy stocks. The proposed climate-change plan is undoubtedly the boldest attempt to address global warming in U.S. history. A proposed new Environmental Protection Agency rule would reduce carbon emission from power plants by 30% by 2030, compared to the levels in 2005.
Just as pro-environment regulations have given a boost to the alternative energy sector, trade conflicts between some of the major solar product manufacturing countries have complicated the landscape. Specially, solar trade relations have heated up lately with China, India and the U.S. trying their level best to protect homegrown interests. Washington has once again slapped new import duties on solar panels and other related products from China. While the new duties would further escalate tensions between the two countries, the U.S. believes that the Chinese manufacturers have hitherto benefited from unfair subsidies offered by their government (read: Will Clean Energy ETFs Bounce Back?)
After a listless 2011, the solar industry rallied in 2013. The U.S. Energy Information Administration (EIA) estimates that U.S solar demand increased more than 32% in 2013. It is likely that for the first time in more than 15 years the U.S. installed more solar capacity than world leader Germany. For 2014, U.S. solar energy consumption, as projected by EIA, will rise by roughly 35%. Residential, commercial, and utility scale solar is indeed booming in the U.S. The expected increase in demand is likely to fuel top-line growth at the solar manufacturers (read: Solar ETFs Shine on Trina Solar Earnings Beat).
While U.S. and China have been playing a big role in recent years in driving the industry, other nations are also pushing hard to have a home-grown solar generation capacity as a remedial measure to solve their electricity crisis. The latest to join this list is Asia's third largest economy, India. Again, companies like First Solar Inc. (FSLR) are investing substantially in Japan to install emission-free renewable set-ups. The country is expected to become the second largest market for solar products after China. This comes on the heels of Japan deactivating all its nuclear reactors after the Fukushima nuclear disaster.
Among the other renewable resources, the U.S. wind industry is now gradually picking up. The American Wind Energy Association (AWEA) reported that the wind industry grew radically during the first quarter of 2014. The U.S. industry installed 214 megawatt (MW) during the first quarter, up significantly from the year-ago installed capacity of 1.6 MW. EIA expects wind capacity to expand 9.0% in 2014 and 15.5% at the end of 2015. Electricity generation from wind is expected to contribute 4.5% to the total electricity generation basket by the end of 2015 (read: Alternative Energy Stock Outlook - May 2014).
Hydropower is considered to be the leading renewable energy source in the U.S. With the emergence of new technologies, like marine and hydrokinetics, this industry is likely to continue to generate vast amounts of sustainable energy throughout the country.
ETFs to Tap the Sector

For investors seeking to play this trend in ETF form, the following series of alternative energy ETFs could make for interesting picks. See all Alternative Energy ETFs here.

WilderHill Clean Energy Portfolio (PBW - Free Report)

Launched in March 2005, PBW tracks the WilderHill Clean Energy Index and manages an asset base of $193.6 million which it invests in a portfolio of 56 stocks.

It is well diversified across various sectors. Information Technology takes the top spot with a 42.39% allocation followed by Industrials (22.49%) and Utilities (10.42%).
The fund’s top 10 holdings jointly contribute 27.91% to the fund. The product invests almost 90% in companies that are involved in the generation of cleaner energy. It charges a hefty 70 basis points in fees.

PBW has rewarded investors with returns of 22.95% over the past one year.

Market Vectors Global Alternative Energy ETF (GEX - Free Report)

Launched in May 2007, GEX tracks the Ardour Global Index, focusing on companies that are primarily engaged in the business of alternative energy comprising solar power, bio energy, wind power, hydro power and geothermal energy.

The fund holds about 31 stocks in its pocket, has assets under management of $108.0 million and charges an expense ratio of 62 basis points annually. The fund is liquid with 13,460 shares changing hands every day on average.

Apart from robust holdings in the U.S., the product offers solid exposure to Europe and some Asian countries. Again, Industrials, Information Technology and Utilities take the top three spots, adding 87.7% in sector holdings. Further, the fund’s top 10 holdings jointly contribute 66.72% to the fund. Vestas Wind Systems A/S, Eaton Corp. (ETN) and Tesla Motors Inc. (TSLA) are the top three holdings, with 32.96% of asset allocation in total.
Global Clean Energy Portfolio (PBD - Free Report)
This ETF follows the WilderHill New Energy Global Innovation Index, giving investors exposure to about 106 companies that are engaged in renewable sources of energy and technologies facilitating cleaner energy.

Assets under management came in at just over $103.6 million and this ETF charges investors 75 basis points a year in fees. In terms of performance, PBD has rewarded investors with returns of 35.08% in a one-year span. The fund’s top 10 holdings contribute 17.96% to it.

PBD is heavy in Industrials, as this represents 32.56% of the fund. This is followed by Information Technology (31.89%) and Utilities (21.10%). In terms of countries, the U.S. dominates with 31.44% followed by China having 14.28%.

First Trust Nasdaq Clean Energy Green Energy Index (QCLN - Free Report)

This ETF tracks the NASDAQ Clean Edge Green Energy Index and follows a benchmark of clean energy companies, giving exposure to 50 such companies in total with an asset base of $121.2 million. The fund charges investors 60 basis points a year in fees for the exposure. The top 10 holdings comprise 57.59% of the total fund. Importantly, this product has rewarded investors with a solid one-year return of 34.14%.

Technology firms dominate this ETF, accounting for 37.18% of the assets. Beyond technology though, Oil and Gas stocks make up about 28.85%, while Industrials, Consumer Goods and Consumer Services hold 15.80%, 7.48% and 5.49%, respectively. In terms of geographical diversification, the fund is almost entirely focused on the U.S. market.

iShares Global Clean Energy ETF (ICLN - Free Report)
This ETF tracks the S&P Global Clean Energy Index with 31 holdings and an asset base of $57.9 million. ICLN has given an impressive one-year return of 31.91% and charges investors 47 basis points a year in fees for the exposure.
In terms of geographical breakdown, U.S. leads the list with 23.62%, while China holds the second spot with 16.59%. Hong Kong comes third occupying 15.21% of the holdings. ICLN is more inclined toward Semiconductors & Semiconductor equipment, representing 31.10% of the fund, though Electrical Equipment (21.07%), Independent Power and Renewable Electric (20.96%), and Electric Utilities (13.38%) all receive big chunks as well. The fund appears to be highly concentrated in the top 10 holdings with a share of 51.47%.
PowerShares Cleantech Portfolio (PZD)
This fund tracks the Ceantech Index, which focuses on firms that are primarily engaged and involved in electric grid, electric meters and devices, networks, energy storage and management, and enabling software used by the smart grid infrastructure sector.

PZD holds 62 securities in total, putting a heavy weight in Industrials (57.67%) and Information Technology (22.22%) companies. The top three holdings are Vestas Wind Systems A/S, Novozymes A/S and BorgWarner Inc (BWA). It charges 0.67% in expense ratio.
Bottom Line

The demand for renewable energy, in particular solar and wind, is rapidly growing for electricity generation in the U.S. As per EIA, renewable electricity generation in the U.S. would grow by an average of 1.9% per year until 2040 and 69% over 28 years (from 2012-2040).
The depletion of fossil fuel reserves, higher oil and gas prices, new and advanced technologies, accompanied with more competent alternative energy applications have made green power more feasible, injecting optimism into the sector.
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