The energy complex beyond the traditional fossil fuel infrastructure has expanded over the last few years to include clean , alternative and renewable energy.

Solid investment decisions in these areas can become difficult as the very definitions are not easily deciphered among the various energy classifications.

Clean technology has been described by Clean Edge, a clean technology research firm, as “a diverse range of products, services, and processes that harness renewable materials and energy sources, dramatically reduce the use of natural resources, and cut or eliminate emissions and wastes.” It notes that “Clean technologies are competitive with, if not superior to, their conventional counterparts. Many also offer significant additional benefits, notably their ability to improve the lives of those in both developed and developing countries”.

Alternative energy can be loosely described as that which is not fossil fuel and includes; wind, sun, biomass and other non-traditional energy sources. This definition is also similar to renewable energy and many times they are used interchangeably.

While the assets continue to grow in what can arguably described as an energy revolution, it is helpful to examine the overall landscape to help shape your firm’s asset allocation decisions in this area.  In this piece we will only touch upon a few general themes as there are many avenues in which to pursue to this portion of “ethos” investing.

It may be helpful to describe two or three Exchange Traded Funds in this space to illustrate the difficulty inherent in constructing a dedicated alternative energy strategy.

Powershares Clean Tech ETF-PZD

This ETF invests according to the Clean Tech LLC Index that focuses on clean tech which “considers a company to be a clean-tech company when it derives at least 50% of its revenues or operating profits from clean-tech businesses”.   Some of the industries that are represented include: application software, auto parts and equipment as well as industrial companies.

The inherent appeal with this approach is the industry diversification that may suit your firm’s risk profile compared to the Guggenheim Solar ETF (TAN) for instance. PZD holds 57% industrial companies and 21% IT while TAN holds over 70% in IT and most of that is within the semi-conductor industry. While it may be a worthy investment, it is very specific and not potentially in line with your overall volatility goal.

Market Vectors Global Alternative Energy ETF-GEX

The Fund normally invests at least 80% of its total assets in stocks of companies primarily engaged in the business of alternative energy. Such companies may include small- and medium-capitalization companies and foreign issuers. Alternative energy refers to the generation of power through environmentally friendly, non traditional sources. It includes power derived principally from bio-fuels (such as ethanol), bio mass, wind, solar, hydro and geothermal sources and also includes the various technologies that support the production, use and storage of these sources.

Semiconductors continue to dominate the IT sector within this fund but we begin to see “pure plays” within the alternative energy complex as renewable electric and independent electric producers are represented.

Market Vectors Environmental Services-EVX

The Fund normally invests at least 80% of its total assets in common stocks and American depositary receipts (“ADRs”) of companies involved in the environmental services industry. The Environmental Services Index is comprised of companies that engage in business activities that may benefit from the global increase in demand for consumer waste disposal, removal and storage of industrial by-products, and the management of associated resources and includes securities of companies that are involved in management, removal and storage of consumer waste and industrial by-products and related environmental services, including waste collection, transfer and disposal services, recycling services, soil remediation, waste-water management and environmental consulting services.

Industrial names are most prevalent here and Waste Management makes up a little over 10% of the portfolio. While we like the concept, a lot of this portfolio is dedicated to trash and basic waste pick-up and disposal.

After taking a brief look at a few of the offerings within the clean tech, alternative energy and environmental services space, it becomes clear that a well defined strategy is necessary to invest in the non-fossil fuel arena as the choices are somewhat diverse in their composition and intent.

It may be the case that ETFs simply do not have the flexibility to invest across these themes where there is value on a consistent basis. There may be great value among these that speak to your client’s beliefs but may need to be managed in a separately managed account to take advantage of the opportunities in all the energy revolution areas.

This short list is just the tip of the iceberg as we will continue to help outline and streamline the significant amount of choices as they relate to your environmental and alternative energy investment efforts.

Sincerely,

Tom Koehler-CIO

 

“Socially Responsible Investments represent a complex asset class and while we covered a small amount, there is a lot more information needed prior to making an investment decision. Let us know if we can provide more information to help in that process.”

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