The rise in interest about sustainability issues has been noticed by providers of exchange traded funds as well, who have created more than a dozen “green investing” ETFs that own stocks of companies involved with clean energy, energy efficiency, water purification, waste management, and recycling. There are also “socially responsible” ETFs that own shares of companies scoring highly on a list of issues such as community relations, diversity, employee relations, and human rights.
After surging in 2008 as oil prices neared $150 a barrel, many green investing ETFs suffered badly when the recession cut oil prices in half. Several ETFs are currently trading below their initial offer price. The reemergence of growth in the world economy, however, may serve to refocus attention–lost during the recession–on sustainability issues and could lead to better performance from this group.
One of the oldest sustainable investment ETFs is the PowerShares WilderHill Clean Energy Portfolio (PBW; Marketweight), which was launched in March 2005, and currently has about $500 million in assets. It has suffered a negative 8.5% annual rate of return since inception through May 10, though other alternative energy ETFs have fared far worse. The ETF owns a broadly diversified portfolio of 54 stocks including alternative energy equipment manufactures and producers, utilities, technology companies, and even chemical manufacturers. Its three largest holdings as of May 10, according to the PowerShares website, together represented just over 9% of the fund, and were JA Solar Holdings (JASO; ****) and ReneSola (SOL; NR), China-based manufacturers of solar cells, and Rubicon Technology (RBCN; NR), an Illinois-based manufacturer of electronic materials used in light emitting diodes and other products.
Water resources have been the subject of growing interest among international development groups and investors alike, and ETF providers have responded with four distinct funds organized around water related themes, all of which have gathered significant assets. The PowerShares’ Water Resources Portfolio (PHO; Marketweight) is notable for the fact that it amassed $1.2 billion in assets since it opened in December 2005, and has the best performance since inception among the water ETFs with a 3.6% average annual return since December, 2005. It owns mostly industrial companies rather than water utilities, which account for less than 12% of its portfolio. Its top three holdings as of May 10 were Tetra Tek (TTEK; NR), a California water consulting and engineering company; Washington DC-based Danaher (DHR; ****), which makes water disinfection systems; and URS (URS; ****), a water systems design and construction firm from San Francisco.
Several ETFs are focused on “cleantech”–products that improve the efficiency or reduce the impact of traditional energy resources. The $58 million PowerShares WilderHill Progressive Energy Portfolio (PUW; Underweight), targets companies that are “involved in transitional energy bridge technologies, with an emphasis on improving the use of fossil fuels,” according to its prospectus. Such companies including top holdings (as of May 10) Owens Corning (OC; NR), an insulation maker; GrafTech International (GTI; NR), which makes graphite for energy and industrial applications; and South Africa’s Sasol (SSL; NR), which is pioneering the use of coal gasification and development of synthetic fuels.
The First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index (GRID; NR) is composed of companies developing technologies to improve the efficiency of the electricity grid. The top three holdings, as of May 10, according to the ETF’s website, were Germany’s SMA Solar Technology (S92 Frankfurt; NR), which manufactures electric current inverters and monitoring systems used in solar power facilities; Quanta Services (PWR; ****), a Houston-based company that designs and builds electric power networks; and Schneider Electric (SU Paris; NR), a French manufacturer of energy management equipment used in industrial and commercial applications. The fund has an average annual return of 2.6% since its November, 2009 launch.
While these funds all take an environmental approach to sustainability, social performance is an important issue for some investors. Two funds offered by iShares, FTSE KLD 400 Social Index (DSI; Marketweight) and FTSE KLD Select Social Index (KLD; Marketweight), have each gathered more than $100 million in assets for portfolios of companies “that have positive social and environmental records.” Their largest holdings tend to be familiar large-cap corporations which have well-funded sustainability programs, such as Microsoft (MSFT; ****), Procter & Gamble (PG; ****), and Johnson & Johnson (JNJ; ****), the three largest holdings in each fund. KLD’s performance has been stronger than other sustainable ETFs, with an average return of 2.1% since it opened in January, 2005, while DSI has returned a negative 2% since it opened in November, 2006.
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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.