The Best Clean Energy ETFs Aren't the Cleanest

NEW YORK ( TheStreet) -- Clean energy exchange-traded funds have grown up parallel to the larger explosion in the ETF universe, and now with at least three years of history, it's possible to take a look at whether these investments make good long-term bets.

The general conclusion that can be drawn is that the best clean energy ETFs for the long haul are not necessarily the "cleanest."

Top-performing ETFs that fit the Morningstar clean energy category include water resources and energy services funds (see chart above), while the long-term laggards are the purer-play clean energy investments, primarily solar funds.

It's no surprise that solar stocks can dominate clean energy indexes, and the more volatile indexes, given the number of public offerings in the sector relative to the rest of the clean energy universe. It's also no surprise that the investment wisdom with clean energy ETFs mirrors the case to be made for clean energy stocks on an individual basis: Pick your spots with momentum plays like solar coming off a bottom and you can profit, but holding any fund weighted to the solar sector for too long hasn't worked yet.

The worst-performing clean energy ETFs over the past three years, through the end of February, are the Market Vectors Solar Energy ETF ( KWT) and the Guggenheim Solar ( TAN) ETF.

Meanwhile, the best-performing clean energy ETF over the past three years is the PowerShares WilderHill Progressive Energy ( PUW) ETF.

Scott Burns, Morningstar director of closed-end and alternative fund research, said the best clean energy ETFs end up investing in utility, industrial, alternative transportation and natural resource companies -- even unconventional oil and gas drillers -- simply because of the dearth of pure-play companies outside of the solar sector. Investing in these types of companies also means investing in bigger cap companies, which reduces volatility.

The top three holdings in the Wilderhill Progressive Energy ETF are India's Tata Motors, Clean Energy Fuels ( CLNE), a builder of natural gas vehicle refueling infrastructure, and Methanex, which produces methanol, not just found in biodiesel but products from windshield washer fluid to recyclable plastic bottles, plywood floors and paint.

Uranium miner Cameco ( CCJ) and Brazilian utility Companhia Energetica de Minas Gerais, are also among the top 20 holdings in this top-performing clean energy fund. Having nuclear power play Cameco in a clean energy ETF isn't going to be music to the ears of most solar and wind energy backers.

There is a similar pattern in Powershares Cleantech ( PZD), one of the other top performers over the past three years that's not water-specific in its approach.

The top two holdings in this fund are broad sector plays, Borg Warner ( BWA), an automotive sector giant, and Schneider Electric, which along with other of the Cleantech ETF's top holdings -- Corning ( GLW), Siemens ( SI), Johnson Controls ( JCI), ABB ( ABB) -- are conglomerates touching everything from power transmission, water services, mining services and oil and gas, to electric car seats, solar, and commercial building florescent and LED lighting applications.

Morningstar's Burns said that while these broader funds avoid volatility, the most important question an investor needs to ask is why invest in a clean energy fund that holds a GE-type stock as a top holding, if that stock is already in your core equities portfolio.

To the extent an investor wants to buy and hold these ETFs as a view that clean energy is the future, it's a matter of timing relative to the rest of the world making this decision.

"We use clean energy ETFs when we are on the road visiting clients to make the point that if the world is running out of energy and the traditional energy grid needs a massive investment in solar, that's great, but if the whole market figured that out three months ago or three years ago, you end up buying at a high, and overpaying as the last sucker in," Burns said.

With the solar ETFs down more than 60% over the past three years, though, overpaying isn't the current problem.

-- Written by Eric Rosenbaum from New York.

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