Clean Energy ETFs: An Oil Hedge?

In the first week of 2010, oil prices bobbed above $80 a barrel, once again, since falling below $35 a barrel in the maelstrom of 2008. While doubts persist that the rally in oil--like the economic recovery itself--will be sustained over the longer-term, the fact that oil has traded at prices in excess of $150 a barrel within the last two years would seem to indicate that maddeningly high energy prices are a threat that cannot be completely dismissed.

If oil prices do spike again, clean energy stocks are a likely beneficiary, as their earnings improve dramatically in a high energy-price environment. For companies like biofuel producers, high oil prices are often the difference between profit and loss.

ETFs focused on clean energy companies have been available for almost five years now, and while the first clean energy ETFs were focused on U.S. companies; they are now mostly global in nature--reflecting the growth of wind power equipment suppliers in Europe and solar panel makers in China. Of the dozen clean energy ETFs listed in the United States, nine are global funds. With economic growth in developing markets such as China, India, and Brazil expected to far surpass that of the developed world, these funds may be able to reap larger gains than those exclusive to the United States.

These global clean energy ETFs generally hold about 30 different stocks and charge between 0.65% and 0.75% in annual expenses, with about 30% of their assets held in U.S.-based companies. While many hold the same companies, their overall portfolios reflect a healthy variety of industry and regional exposures, giving each its own unique character.

Three broad-based clean energy funds hold the lion's share of the sector's assets. The Van Eck Global Alternative Energy Fund (GEX), with $212 million in assets, has the largest U.S. allocation at 42%, followed by Spain and Denmark with about 10% each. Its top three holdings are Danish wind turbine manufacturer Vestas Wind Systems (VWS), Arizona-based thin-film solar cell maker First Solar Inc., (FSLR), and North Carolina-based LED lighting manufacturer Cree Inc., (CREE).

PowerShares Global Clean Energy Portfolio (PBD), is the most diverse fund, with its $207 million in assets spread across 87 different holdings. About 25% of its assets are in U.S.-based companies, with China and Germany accounting for 10% each. Its three largest holdings--each less than 3% of the fund--are Vestas Wind Systems, its Spanish rival Gamesa (GAM), and Belgian wind gear box manufacturer Hansen Transmissions (HSN).

The iShares S&P Global Clean Energy Index ETF (ICLN), is somewhat smaller with $84 million in assets. The fund has 24% of its assets in U.S. companies, followed by China with 21%, and Spain at 13%. About 76% of its holdings are either electrical equipment makers or independent electric power producers. Its three largest holdings are Brazilian electric utility Companhia Paranaense de Energia (ELP), Chinese solar cell maker Suntech Power (STP), and Chilean power utility Empresa Nacional (EOC).

There are two ETFs each targeting the solar and wind power industries exclusively. The Claymore/Mac Global Solar Index ETF (TAN), rivals the size of the largest clean energy ETFs with $214 million in assets. The United States, China, and Germany each account for about 30% of its assets. Its top three holdings are First Solar; Renewable Energy Corp., (REC), a solar cell manufacturer based in Norway; and Changzhou, China-based solar cell maker Trina Solar (TSL).

The Market Vectors Solar Energy ETF (KWT), with $34 million in assets, has almost identical country weightings and top-10 holdings as the Claymore fund, though its second largest holding is silicon wafer maker MEMC Electronic Materials (WFR), and its third largest is Suntech Power.

The two wind power ETFs--the First Trust Global Wind Energy Index (FAN), with $96 million in assets, and the PowerShares Global Wind Energy ETF (PWND), with $44 million in assets, are remarkably similar as well, though the First Trust fund charges a relatively high 0.95% expense ratio compared to 0.75% for the PowerShares fund. Both funds make Iberian renewable power producers EDP Renov?veis (EDPR), and Iberdrola Renovables (IBR), their top two holdings, followed by Vestas for the First Trust fund and Gamesa for the PowerShares Fund. Both funds are heavily weighted to Spain as a result. The PowerShares fund has the lowest allocation to the United States of all the clean energy ETFs, at just under 10%.

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S&P Senior Financial Writer Vaughan Scully can be reached at Vaughan_scully@standardandpoors.com. Send him your ideas for ETF story topics.

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