Renewable Energy Mutual Funds
Given all the attention that renewable energy is getting in the news over the last couple years, investing in renewable energy has become a hot topic. People are drawn to renewable energy for one of several reasons:
- To fight Global Warming
- To prepare for Peak Oil.
- To improve Energy Security and local economies.
- To cash in on the above trends.
The beauty of investing in renewable energy companies is that these goals are not mutually exclusive. With one investment, the investor can feel good about what his money is doing for three reasons, while putting his money in what is proving to be a spectacular growth story.
How To Invest
For mutual fund investors, Renewable Energy focused mutual funds have been few and far between, but the recent growth of interest in the sector has lead to a plethora of new offerings. US investors can choose from load funds such as the New Alternatives Fund (NALFX) and Calvert Global Alternative Energy Fund (CGAEX) and the no-load Guinness Atkinson Alternative Energy Fund (GAAEX). Unfortunately, the load funds have expense ratios in excess of 1.25%, and the Guinness Atkinson fund’s ratio is 1.98%. Given these high expenses, I strongly prefer the industry ETFs.
The Powershares Wilderhill Clean Energy ETF (PBW) and NASDAQ Clean Edge U.S. Liquid Series ETF (QCLN) have expense ratios currently capped at 0.60%, high compared to a general energy sector ETF such as XLE (0.24%), but is a much more economical way to invest than the sector mutual funds. Unfortunately, both of these ETFs track US-based indices, and so provide little international diversification. The newMarket Vectors Global Alternative Energy ETF (GEX), neatly solves this problem with a portfolio similar to the more diverse mutual funds, and an expense ratio of only 0.5%, which easily makes it my favorite fund in the space. Also recently launched, thePowershares Global Clean Energy Portfolio (PBD) has broader diversification into a greater number of small cap companies, but given its expense ratio of 0.75%, an investor with over $5,000 to put into the sector could closely replicate PBD by splitting his allocation 50-50 between GEX and PBW or QCLN.
Given the relatively high expenses of the sector ETFs, I believe it makes sense for investors who are looking to invest $25,000 or more in the sector for a period of years to build their own ETF from individual stocks gleaned from the holdings of the above ETFs and mutual funds. This also opens the possibility of focusing on established companies which are early movers into the renewable energy arena, a strategy which is less likely to lead to spectacular gains, but which also gives some protection against spectacular dot-com bust style losses. Investors seeking a greater international exposure could mix GEX with a smaller portfolio of domestic companies.
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