ETF Update

Return to Article

Clean-Energy ETFs Volatile, but Hold Potential

Billy Fisher

Last year was a bright one for clean-energy ETFs such as the PowerShares WilderHill Clean Energy Fund(PBW Quote), the PowerShares Global Clean Energy Fund(PBD Quote) and the Market Vectors Global Alternative Energy ETF(GEX Quote). These funds outperformed the market by considerable margins.

This year has been a completely different story. The repricing of risk has taken the wind out of their sails. Year to date, these funds are down 33.4%, 25.3% and 29.8% respectively, while the S&P 500 is only down 11.6% over this same period.

Now, the question is whether these sharp pullbacks make for ideal buying opportunities, or whether these funds will face further selloffs.

Jenny Chase, senior solar analyst for New Energy Finance, believes that some of the solar stocks have good long-term perspectives, although they will likely be accompanied by some volatility.

"Over a 10-year timeframe, some of these stocks look great, but things might be rocky along the way," she says.

Chase does think that ETFs are a sound way to invest in clean energy.

"It can be pretty hard to pick winners among these companies," she said. "ETFs are a good way to spread your bets across the industry."

Matt Hougan, editor of IndexUniverse.com, agrees with Chase. "ETFs in general are a better way to play the clean energy theme since they cover the entire sector," he says.

Among the clean-energy ETFs, Hougan likes the Market Vectors Global Alternative Energy ETF. "It's a more diversified play on a global industry," he says. "I like its global perspective."

Market Vectors has top holdings that include First Solar(FSLR Quote), Itron(ITRI Quote), Cree(CREE Quote) and SunPower(SPWR Quote). It also holds names that trade on foreign exchanges such as Vestas Wind Systems, Gamesa, Kurita Water and Q-Cells.

One of the primary challenges faced by many clean-energy companies is cost competitiveness. Pete Najarian, cofounder of optionMONSTER.com and a panelist for CNBC's "Fast Money," says, "It's important for investors to understand -- what is right and what is profitable might be two separate things."

Najarian likens some of the clean-energy plays to a biotech company that is engaged in early-stage clinical trials for a particular drug. He does note that there have been some significant advances in the industry.

"Solar is getting more efficient all of the time," he says. "There are all kinds of opportunities in the [clean-energy] space."

Najarian doesn't necessarily think ETFs are the best way to play clean energy. "Personally, I have always liked going for individual names," he says, because there's greater upside potential. Of course, that's because there's greater risk, as well.

Najarian emphasizes the importance of knowing the underlying holdings and how they are weighted for investors who do decide to go with ETFs. For instance, the Market Vectors ETF has approximately 30 holdings, yet Vestas Wind Systems and First Solar account for more than 23% of the fund's net assets. The WilderHill Clean Energy ETF, on the other hand, takes a more balanced approach in weighting its 40-plus holdings.

Among the individual components of these clean-energy ETFs, Ted Sullivan, an analyst for Lux Research, likes Applied Materials(AMAT Quote), a top holding of the WilderHill Clean Energy Fund. The supplier of products and services to the semiconductor industry has seen its stock soar 21.4% already this year and was recently upgraded by Caris & Company, which sees promise in its solar-power business.

Sullivan also likes First Solar and Suntech Power Holdings(STP Quote). First Solar is a top holding of the Market Vectors ETF as well as the WilderHill Clean Energy Fund. Suntech is a top holding of the Market Vectors fund.

"First Solar is an absolute cost leader and will continue to be for the next five or so years," he says. "Suntech has done a good job building up its market very quickly."