Climate change has become a popular investment theme in recent years, giving rise to green stocks and mutual funds that focus on issues such as global warming and alternative energy.

Among the larger mutual funds out there are the Winslow Green Growth ( WGGFX), Guinness Atkinson Alternative Energy ( GAAEX) and the DWS Climate Change ( WRMSX) portfolios.

As the chart shows, these funds have lost about half of their value in the past year, more than doubling the 22% decline of the S&P 500 index. These funds serve as proxies for alternative energy and are prone to wide swings. They've gained at least 26% since March 9, keeping pace with the broader market's rally. The Winslow Green fund led the pack, rising 34%.

Climate Funds
BigCharts.com

The poor relative performance of the past year is no reason to give up on the strategy. Most of the stocks in the green space are those of industrial or technology companies. While those sectors lose more value than most industries during slowdowns, they can lead economic expansions. In some ways, it's reassuring that the shares have acted predictably in the past year.

Winslow Green has the most interesting portfolio. It covers the bases of solar and green technology, but its largest holding is WaterFurnace Renewable Energy ( WFFIF), a geothermal stock. WaterFurnace shares have lost 5.6% in the past year, outperforming the S&P 500.

DWS Climate Change's portfolio is a bit of a disappointment. At year-end, its top holdings included General Electric ( GE), United Technologies ( UTX) and Siemens ( SI). All three are active in the space, but their alternative energy divisions are too small to move the needle for any of them.

The Guinness fund has favored solar stocks since 2006, which has dragged the fund down in the past year. The portfolio also has a little exposure to wind power with turbine maker Vestas Wind Systems ( VWDRY).

Picking a fund requires investors to predict the direction of alternative energy. If you think solar energy will lead a rebound then the Guinness fund might be the best choice. If you think green technology will take the limelight, the Winslow Green fund might be the way to go.

A year ago, I called solar stocks and exchange-traded funds faddish. They had had a great run, but they seemed overextended. After all, solar power won't be affordable for widespread use for years. The companies' stocks have dropped more than the broader market in the past year.

Investors need to realize that adding alternative energy companies to a diversified portfolio will create volatility. This helps on the way up, but it will hurt on the way down.

At the time of publication, Nusbaum held shares of United Technologies through a client portfolio, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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