Will Clean Energy ETFs Bounce Back?

RELATED QUOTES

SymbolPriceChange
PBW4.30-0.09
QCLN14.73-0.45
PBD10.46-0.32

Clean or renewable energy stocks have seen choppy trade since a couple of months as investors are fleeing high growth and high beta stocks on valuation concerns and profit-taking activity.

While the sluggish trend that stemmed from the broad sell-off could continue in the near term, the long-term outlook seems bright. This is especially true as global warming and high fuel emission issues are leading to rising popularity of clean energy sources (read: 3 Green Energy ETF Buys for St Patrick's Day).

The demand for renewable energy, in particular solar and wind, is rapidly growing for electricity generation in the U.S. As per the Energy Information Administration (EIA), renewable electricity generation in the U.S. would grow by an average 1.9% per year until 2040 and total of 69% over 28 years (from 2012–2040).

The alternative energy sector is seeing a global boom led by China, Europe, the U.S. and Japan, and might outpace the rising shale oil and gas business in the coming years. The depletion of fossil fuel reserves, higher oil and gas prices, new and advanced technologies, and more efficient alternative energy applications have made clean power more viable, injecting optimism into the sector.

Moreover, the sector is well placed in the top 13% as per the Zacks Industry Rank, suggesting bullish fundamentals for the green stocks in the coming months.

Investors seeking to ride out this surging trend in the space could tap the beaten down stock prices in the form of ETFs given that America continues its green energy efficiency. Below, we have highlighted three ETFs that are not restricted to one source of energy but provide diversified exposure to various green energy sources (see: all the Alternative Energy ETFs here):

PowerShares WilderHill Clean Energy Portfolio Fund (PBW)

This product follows the WilderHill Clean Energy Index and targets the stocks, which focus on greener and generally renewable sources of energy, as well as technologies that facilitate cleaner energy. The fund has amassed $205.3 million in its asset base and sees solid volume of more than 446,000 shares a day. Expense ratio came in at 0.70%.

The ETF holds about 56 stocks in its basket and is pretty well spread out across various securities, as each make up for less than 3% of total assets. Gentherm (THRM), Polypore International (PPO) and Maxwell Technologies (MXWL) are the top three elements in the basket. From a sector look, the focus is on information technology firms (42%), but industrials and utilities also receive double-digit allocations.

PBW was down about 4.8% over the past one month.

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)

This fund provides exposure to clean energy companies across a wide range of industries, including solar power, biofuels, advanced batteries, as well as the installation of new technological systems. It tracks the Nasdaq Clean Edge Green Energy Index and manages assets worth $164.3 million. It charges 60 bps in fees per year while volume is good at over 125,000 shares, suggesting a relatively tight bid/ask spread (read: Will Solar ETFs be Powered by Earnings Beat?).

In total, the product holds 50 securities in its basket with largest allocations to Linear Technology (LLTC), First Solar (FSLR) and Tesla Motors (TSLA). These firms combined make up for 23.2% of total assets. From a sector look, technology firms dominate this ETF, accounting for nearly two-thirds of the assets while industrials round off to the next spot.

QCLN lost over 4% over the trailing one-month period but has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook.

PowerShares Global Clean Energy Portfolio (PBD)

This product provides global exposure to the stocks that focus in on greener and generally renewable sources of energy as well as technologies that facilitate cleaner energy. It can be done by tracking the WilderHill New Energy Global Innovation Index. Holding 105 stocks in its basket, the fund is widely spread with no single security holding more than 2.04% of PBD.

The product is skewed toward technology and industrials (32.4%) with over 32% share each, while utilities also receive a sizable allocation. In terms of countries, the U.S. makes up about one-third of the portfolio, followed by China (14.4%) and Germany (6.1%). The product has been able to manage assets worth $91.6 million and trades in solid volume of more than 446,000 shares per day. Expense ratio came in at 0.81%.

The ETF lost nearly 0.3% in the trailing one-month period and has a Zacks ETF Rank of 3 or ‘Hold’ rating with a ‘High’ risk outlook (read: A Beginner's Guide to Alternative Energy ETFs).

Bottom Line

A pullback in the alternative ETFs is definitely a buying opportunity for long-term investors given favorable green energy trends. Additionally, investors should note that many alternative energy funds still must go a long way to reach their all-time highs, suggesting more room for upside in the coming months.

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Read the analyst report on PBD


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