As the world begins to recover from a global recession, political attention is starting to shift to other areas. One such area is clean energy, making green exchange traded funds an interesting place to look.
One reason that green ETFs may be attractive in the near future is the portion of the U.S. energy policy which calls for a reduction of 30%-40% in emmissions over the next few years. In fact, the American Clean Energy and Security Act aims to cut emissions from 2005 levels by 17% in 2020 and 83% by 2050.
A second reason that green ETFs might be attractive is that clean energy is becoming cheaper, more efficient and more competitively viable. Take the solar industry, for example, where innovation and technology is enabling the development of a new thin-film panel technology that will soon replace the limited capacity produced from polysilicon panels, pushing efficiency of solar panels up near the 20% mark.
Not surprisingly, green ETFs and alternative energy ETFs have been highly correlated to energy prices over the past couple of years. As the price of oil goes up, alternative fuels and clean energy become more compettive as substitutes. The collapse of energy prices during the last half of 2008, likewise, saw corresponding declines in alternative energy and clean energy equities.
This doesn’t mean that green ETFs don’t come with disadvantages. Green ETFs generally lack diversity, lack the liquidity of larger ETFs and can be subject to big price swings. Additionally, as emerging nations continue to grow and prosper, they will continue to demand emergy, most likely coal and crude oil, to fuel their factories and businesses which could further put a damper on green ETFs.
From an investor’s perspective, one can grab exposure to clean energy through the following ETFs: the Claymore Global Solar Energy ETF (TAN), which will give exposure to the solar subsector of the industry, the Market Vectors Global Alternative Energy (GEX) which gives one global exposure to green energy, First Trust’s Global Wind Energy (FAN) or the PowerShares WilderHill Progressive Energy (PUW) which gives a broader, more diverse exposure to green energy.
