An issue with alternative-energy funds is that the world is still trying to sort out which parts of the theme make the most sense economically and where the long-term winners will come from. That creates a fundamental disconnect, meaning that, for now, investors should expect stocks and funds to trade on emotion and be subject to the whims of the oil market. The thinking here is that if oil prices spike, that creates a perception of urgency, and so the alternative-energy stocks rise. Conversely, if oil drops in price, the need to find alternatives, sentiment-wise, gets put on the back burner, and the stocks fall.

At some point, company fundamentals such as revenue and earnings will connect with stock prices. Ardent supporters of alternative energy would likely tell us that the fundamentals are the most important thing now, but the trading history doesn't corroborate that notion.

In integrating a fund like the iShares Global Clean Energy Index ETF into a diversified portfolio, the majority of the groups listed above make it a proxy for the industrial sector -- and as a source for volatility. Because of the volatility, I would think most investors would prefer a small weighting to this fund or any proxy for alternative energy. While it seems unlikely that the broad market will fall by half again during this economic cycle, if that were to happen, the iShares Global Clean Energy would probably go down even more.
At the time of publication, Roger Nusbaum had no positions in the securities mentioned.

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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