From the October 2008 issue of Research Magazine • Subscribe!

October 1, 2008

Energy ETFs Hit by Lower Oil Prices, Political Fallout

The sun was shining on solar power and other renewable sectors at the end of September when the U.S. Senate passed a bill (the Energy Improvement and Extension Act of 2008) that would guarantee: (1) $18 billion in tax credits for those using wind, solar and geothermal energy sources; and (2) 30-percent tax credits for those purchasing residential, commercial and utility-scale solar photovoltaic systems with no cap for eight years.

The immediate reaction of alternative energy ETFs like the First Trust ISE Global Wind Energy (FAN) and the Claymore/MAC Global Solar Energy (TAN) was rather subdued.

Any gains were quickly erased after House Democrats scuttled their own bill by introducing a new one that is weighed down with a provision to pay for renewable tax cuts with money pulled from other sources.

Even broad alternative or clean energy ETFs, like the PowerShares WilderHill Clean Energy Portfolio (PBW) and the Market Vectors Global Alternative Energy ETF (GEX), have been subject to (at times) violent volatility. Plus, alternative energy has lost momentum, as the price of oil retreated from close to $150/barrel to about $100/barrel.

While government subsidies can help or hurt, it seems like the general motivation to pursue clean and alternative energy sources is directly linked to the price of oil.

The PowerShares WilderHill Clean Energy Portfolio, the oldest clean energy ETF, is down around 50 percent for the year. This seems cheap, but with a P/E ratio around 20, there is still more room to the downside. Considering the overall picture of U.S. and world equities, it would be prudent to wait for a confirmed uptrend before committing money to narrow sector ETFs, even though the long term growth potential might be substantial.

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