After being stressed over the past few years, the renewable energy
sector has fired on all cylinders and is the major gainer this
year, clearly outpacing the broad market. This is largely thanks to
a number of growth stocks in the space, which was backed by the
surging stock market, favorable green energy trends and Obama’s
‘Climate Change Action Plan’.
Obama Plan Proves Beneficial
In June, President Obama unveiled a broad environmental plan in
order to curb carbon pollution from coal-fired power plants and
make cleaner forms of American-made energy. The plan hinges on
three pillars – cutting carbon emissions, preparing for the impact
of climate change, and leading international efforts on the subject
(read: 3 ETFs to Buy for Obama's Climate Change Plan).
The strategy would definitely benefit a variety of clean energy
firms, as it would improve energy efficiency across the board while
reducing other non-carbon emissions. The surge can already be seen
in many renewable energy stocks like
First Solar
(FSLR) and
SolarCity
(SCTY), though trading
has been slightly choppy of late due to mixed earnings and
disappointing guidance by many firms.
Solid Industry Outlook
The depletion of fossil fuel reserves, higher oil and gas prices,
as well as more efficient alternative energy applications has made
clean power more viable, adding optimism into the sector. The
demand for renewable energy, in particular wind and solar, is
growing by leaps and bounds for electricity generation in the
U.S.
Currently, clean energy accounts for nearly 16% of U.S. electricity
generation and is expected to increase to 33% over the next three
years, as per the Energy Information Administration (EIA). This is
especially true given that global warming and high fuel emissions
issues have resulted in rising popularity of clean energy sources
(read: 5 Clean Energy ETFs Leading the Sector's Surge).
The new and advanced technologies are able to provide clean
environment and have reduced dependence on fossil fuels, coal or
other energy resources, suggesting a bullish outlook on the clean
energy stocks. Moreover, the EIA projects clean energy production
to grow at a faster rate through 2040. In fact, solar, wind and
geothermal production will likely double over the next 25
years.
Given the bright outlook and the firmer oil prices, the trend of a
bull run in the space is likely to continue into 2014. As such,
investors seeking to ride out this booming trend want to tap the
space in the ETF form.
For those investors, we have highlighted three ETFs that could be
worth a look if America continues to embrace green technology, and
energy efficiency (see: all the Alternative Energy ETFs here).
First Trust NASDAQ Clean Edge Green Energy Index Fund
(QCLN)
This fund tracks the Nasdaq Clean Edge Green Energy Index and
managed assets worth $90.7 million. It charges 60 bps in fees per
year while volume is light suggesting a wide bid/ask spread.
In total, the product holds 43 securities in its basket with
largest allocations to
Linear Technology
(LLTC),
FSLR and
ITC Holdings
(ITC). These firms
combined make up for 23% of total assets. From a sector look,
technology firms dominate this ETF, accounting for nearly
two-fifths of the assets while oil & gas, and industrials round
out the next two spots.
QCLN is up 83.6% in the year-to-date time frame and it has a Zacks
ETF Rank of 1 or ‘Strong Buy’ rating with a ‘High’ risk
outlook.
Market Vectors Global Alternative Energy ETF
(GEX)
This ETF provides global exposure to about 31 companies that are
primarily engaged in the business of alternative energy by tracking
the Ardour Global Index. The fund holds roughly 30 stocks in its
basket with AUM of $92.6 million while charging 62 bps in fees per
year. Average daily volume is also paltry for this fund (read: A
Comprehensive Guide to Alternative Energy ETFs).
The product is highly concentrated on the top firm –
Eaton
(ETN) – with 10% of
assets, closely followed by
Cree
(CREE) and
Vestas Wind Systems
(VWDRY) with at least 8%
share each. From a sector perspective, industrials take the largest
share with 47% while information technology (26.5%) and utilities
(14.7%) round off to the next two spots.
In terms of country exposure, the fund is skewed toward the U.S.
with 59% share while China, Denmark, Italy and many others receive
minor allocations. The ETF has gained over 62% year-to-date.
PowerShares WilderHill Clean Energy Portfolio Fund
(PBW)
This product follows the WilderHill Clean Energy Index, holding
about 51 stocks in its basket. The fund has amassed $202.4 million
in its asset base and sees solid volume of more than 420,000 shares
a day. The expense ratio comes in at 0.70%.
The ETF is pretty well spread out across various securities, as
each make up less than 4.6% of total assets.
Canadian Solar
(CSIQ),
SunEdison
(SUNE), and
FuelCell Energy
(FCEL) are the top three
elements in the basket. From a sector look, the focus is on
information technology firms (46%), but industrials and materials
also receive double-digit allocations.
PBW added nearly 51% in the year-to-date time frame (read: Can the
Clean Energy ETF Bull Run Continue?).
Bottom Line
Given strong fundamentals ahead, investors should ‘go green’ with
the above three products that are slightly tilted toward growth
stocks, and are expected to deliver above-average returns compared
to others in the space.
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FIRST SOLAR INC (FSLR): Free Stock Analysis Report
MKT VEC-GLBL AE (GEX): ETF Research Reports
PWRSH-W CL EGY (PBW): ETF Research Reports
NASDAQ-CL EDG G (QCLN): ETF Research Reports
SOLARCITY CORP (SCTY): Free Stock Analysis Report
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