The April 20 Deepwater Horizon explosion in the Gulf of Mexico and the seemingly unstoppable flow of oil from the ocean floor is turning into one of the greatest environmental catastrophes of modern times. The full implications of the disaster will not be known for years, but there is little doubt that there will be far-reaching economic consequences as outrage over the environmental damage will demand political action. A regulatory backlash against offshore drilling has already begun, with US President Barack Obama placing a six-month moratorium on offshore permits and Norway halting new deepwater drilling in the North Sea.
Concerns about carbon dioxide from fossil fuels contributing to climate change already produced strong support for alternative energy sources around the world. Most developed nations already provide research and purchase subsidies to push these new technologies forward. With the increased difficulty of accessing hydrocarbon fuels like oil and gas, ‘clean’ energy like wind, solar or even nuclear power becomes even more viable. However, we are still in the early stages of commercialising most of these alternative energy sources. Without the foresight to pick winners among these alternative technologies, a diversified ETF is a good way to invest in the trend towards clean energy.
Since the accident, BP’s stock price has been hammered, falling well over 40% compared to about a 10% decline in the FTSE 100 index. Over that same timespan, the returns on the seven clean energy ETFs available in Europe have been between -4.5% and -16.6%, all of them bettering the returns on the STOXX 600 Oil and Gas Index. While the evidence so far suggests that Big Oil’s loss is alternative energy’s gain, the real investment opportunity is over the long-haul as societies transition to reduced carbon emissions and more sustainable energy sources.
Choosing an ETF 
In addition to the usual considerations in choosing between similar ETFs such as the method of replication (physical or swap-based), the treatment of dividends (capitalising or distributing), as well as the size, trading volume and expense ratio, choosing an alternative energy ETF requires a deeper dive into the specifics of each portfolio. Unlike a straightforward country- or sector-specific index, the alternative energy indices have more leeway in terms of how they choose the number and weighting of stocks in their holdings. Does one consider nuclear power to be ‘alternative energy’? How about a company like General Electric that has a large wind energy group, but most of its revenues comes from other industrial lines of business? Of these seven alternative energy ETFs, none share the same index. There is no one standard for the ‘clean’ or ‘alternative’ energy sector, unlike indices for technology or oil and gas.
With the number of holdings in these ETFs ranging from a low of 15 to a high of 100, investors have a great choice in terms of diversification versus concentration. The range of ETFs also feature different weighting schemes, from traditional market capitalisation to equal-weighting to a mixed weighting. Also, some indices strictly include companies involved in energy production, while others include services, efficiency, and other related sub-sectors. Let’s take a closer look at each ETF in turn.
EasyETF Global Renewable Energy
As the name says, this ETF invests in the renewable energy space worldwide, including solar, wind, thermal, biofuel, hydropower and biomass energy. Weightings of the stocks in the index are based on liquidity, fundamentals, and the connection to the renewable energy theme. Only one stock, Fortum, has a 5% weighting, so the index is well diversified across companies. By country, the US has the greatest weighting, representing a quarter of the total value. It’s followed by China, Spain and Germany with another 45% combined.
ETFX DAXglobal Alternative Energy
Because it only holds the stocks of 15 of the largest alternative energy companies in the world, the DAXglobal index is the least diversified of its peers. Still, after the US weighting of 31%, there are an additional ten countries represented in the index, with each one weighting between 2% and 12% of the total. The index is also well-balanced by sub-sector, as only three companies are selected from each of the categories of wind, solar, natural gas, ethanol and a combination of geo-thermal, hydro and batteries. Each sub-sector is also equally weighted.
ETFX WNA Global Nuclear Energy
While perhaps not as ‘clean’ as wind or solar power because of radioactive waste by-products, nuclear energy does have the advantage of eliminating carbon emissions. The nuclear industry was dealt a severe blow in the 1970s and 1980s by the Three Mile Island and Chernobyl accidents, but new technology has made reactors much safer. France relies on nuclear energy for nearly 80% of its electricity, a higher percentage than anywhere else in the world, and China is embarking on an ambitious program of building 132 new reactors, so the industry has great growth potential.
Unlike the remainder of the list, this ETF invests exclusively in the nuclear energy industry, including utilities, construction, and uranium producers, and attempts to include every relevant publicly-traded company globally. Each sector is weighted differently, with holdings in reactor and construction companies equal-weighted (15% of the portfolio in each sub-sector), capitalisation-weighting for fuel (20% of the portfolio) and service companies (25%), and capitalisation-weighting adjusted by the percentage of power output generated by nuclear energy for the power generation sector (25%). By country, the US accounts for 38% of the index, followed by Japan with 23% and France with 10%.
iShares S&P Global Clean Energy
The 30 companies included in this ETF are split, with about two-thirds involved in energy production and one-third technology/equipment providers. Once again, the US has the biggest representation in the index with one-third of the companies and 29% of the portfolio weighting, followed by China and Brazil. Companies are included based on their exposure to Standard & Poor’s defined clean energy sources: biofuels/biomass, ethanol, fuel cells, geothermal, hydroelectric, wind, and solar. If there are not 30 companies primarily involved in these businesses in the available universe, then other companies with significant but less than 50% exposure are included to reach the 30 count, but at only half of the full market capitalisation weighting.
Osmosis Climate Solutions
This ETF is unique among its peers with its equal 1% weighting in 100 stocks and more expansive portfolio that includes not only clean energy production firms but also companies emphasising energy efficiency and resource management, pollution control and even carbon trading. Energy production is about 31% of the index, efficiency another 32%, water and waste management 36%, with a carbon emission permits exchange rounding out the rest. To be included in the index a company must derive more than half its revenue from the efficient use of natural resources or climate change mitigation.
PowerShares Global Clean Energy
This ETF is based on another equal-weighted index, the WilderHill New Energy Global Innovation Index. Sector and size caps ensure additional diversification. As well as the usual alternative energy production, this index includes companies involved in pollution control, energy efficiency and cleaner waste storage. 20 different countries are represented in the index.
Our petroleum-based economy won’t disappear overnight. No one questions the importance of oil and coal to meeting our energy needs. It will take years if not decades for ‘clean’ alternatives to compete with the efficiency of ‘dirty’ energy sources. But as the costs of exploration and production of new sources of oil continue to soar, the rising price of oil will make non-fossil-fuel energy sources a more compelling alternative. The replacement of ‘dirty’ energy with ‘clean’ energy may be a slow process, but that won’t stop it from being a potentially profitable change for long-term investors.
