Alternative Energy ETFs: Murky Outlook

These ETFs have turned in a dismal performance over the past few months, with the long exception being the PowerShares WilderHill Progressive Energy Fund.
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NEW YORK (TheStreet) -- Alternative energy ETFs have had a dismal performance over the past few months, with only one fund in positive territory this year, PowerShares WilderHill Progressive Energy Fund (PUW) .

Across the board, alternative energy ETFs have suffered considerably. Funds that centralize around one specific form of energy, such as the

Claymore/MAC Global Solar Index Fund

(TAN) - Get Report

and the

Market Vectors Solar Energy fund

(KWT)

within the solar power sector, or

PowerShares Global Wind Energy Portfolio

(PWND)

and

First Trust Global Wind Energy

(FAN) - Get Report

within the wind power sector, have been particularly vulnerable, suffering year to date losses in the range of 27% to 31%.

Broader alt-energy funds have performed slightly better, although still incurring losses between 6% and 22%.

Only one fund, the PowerShares WilderHill Progressive Energy Fund has performed positively throughout the course of the year, attaining YTD growth of 1.53%.

The main reason for the difference is that PUW is heavily invested in non-alternative energy companies. Instead of owning the firms developing new forms of energy and their suppliers, PUW owns companies working on bridge technologies and efficiency.

This means that PUW ends up owning industrial firms involved in alternative energy as one part of their business. For instance, PUW's top holdings include

Owens Corning

(OC) - Get Report

(3.22%),

GrafTech International

(GTI)

(2.97%),

Southwestern Energy

(SWN) - Get Report

(2.90%), and

Tenneco

(TEN) - Get Report

(2.88%), while a fund like the

Market Vectors Global Alternative Energy ETF

(GEX)

features hefty shares in

Vestas Wind Systems

(10.59%) and

First Solar

(FSLR) - Get Report

(7.71%).

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The industrials sector, as a whole, tends to be extremely diverse; a company falling under this sector could be anything from an independent wind turbine manufacturing corporation to

General Electric

(GE) - Get Report

. It is accurate to list all these companies as such, but when one observes a 36.5% industrial weighting in

PowerShares WilderHill Clean Energy

(PBW) - Get Report

(PBW) and 42.9% in PUW, it could really mean a variety of companies.

This can happen across other sectors as well, and it means you cannot simply compare sector allocations to one another in alternative energy funds. You need to delve deeper into the subsectors, or even take a look at the individual holdings within the fund, in order to understand the inner workings of the ETF.

All in all, this demonstrates a need for investors to do their homework.

With the

iShares Dow Jones U.S. Industrials

(IYJ) - Get Report

up about 5% this year, it makes sense for PUW to be up as well, given that it owns industrials that are also found in IYJ. Unfortunately for investors looking to invest in this alternative energy leader, PUW has meager volume of about 10,000 shares per day.

Therefore, while PUW looks to be the best of the alt-energy bunch right now, eager investors should be wary of the fund's low liquidity, as during the "flash crash" this past May, PUW briefly plummeted to 14 cents per share. For now, better bets may be found in the

natural gas sector

, which is considered by many to be a bridge fuel.

Overall, with potential federal legislation hanging over the sector, alternative energy ETFs look to be a murky area of investment in the near future.

-- Written by Don Dion in Williamstown, Mass.

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At the time of publication, Dion Money Management was not long any of the equities mentioned.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.