It wasn’t that long ago that crude oil was over $150 per barrel and the world was clamoring for alternative energy sources. Politicians and the public were angry and motivated. Clean energy stocks were soaring and the moon was the next stop. But shortly thereafter, oil prices dramatically fell and the financial crisis took center stage. What happened? And is clean energy investing still a good investment theme?
Like most emerging industries, alternative energy is volatile and littered with risks. Most companies within the sector have yet to turn a profit. It’s very similar to the good old days in the late 1990s when many Internet startups were all promise and no profits. Some succeeded, but most failed.
Robert Wilder CEO and founder of Wildershares describes today’s clean energy market as a “mixed bag.” And in 2010, clean energy stocks have lagged conventional energy stocks along with underperforming broader stock indexes.
Does this spell trouble for alternative energy sector?
Alternative energy typically uses renewable resources like sunlight, wind, rain, tides and geothermal heat to produce energy. Unstable oil prices, concerns about global climate change and the U.S. government’s growing support of renewable energy through legislation have driven the push to commercialize alternative energy sources.
Still, alternative energy faces many obstacles.
Tight credit markets along with falling natural gas prices have eliminated or stalled many alternative energy projects. Even without these obstacles, new methods for producing energy can take many years before becoming accepted standards. Furthermore, for alternative energy to really succeed, people’s behavioral patterns must shift away from old ways of thinking to new ones.
Many companies within the alternative energy sector are funded by venture capitalists and not yet publicly traded. The vast majority of investors will never get the opportunity to invest in venture funded start-ups and even if they could, most probably couldn’t stomach the risk.
The next best option may be alternative energy ETFs. Let’s analyze them.
The construction of nuclear plants has two primary barriers: financing and time. The last completed nuclear reactor, Watts Bar-1, went online in 1996 but it took 24 years to complete. The estimated cost of a new nuclear plant in the U.S. is $6-10 billion. As a result, it’s usually more economical to stretch out the life of existing plants by installing additional reactor blocks.
The Market Vectors Nuclear Energy ETF (NLR) follows the performance of nuclear stocks inside the DAXglobal Nuclear Energy Index. NLR currently owns 24 different nuclear stocks and has a small year-to-date loss of 0.13 percent. NLR’s annual expense ratio is 0.61 percent.
Solar energy uses photovoltaic panels to capture energy from the sun which is then converted into electricity. In 2009 around 2,000 megawatts of solar capacity were generated. Still, solar energy accounts for less than 1 percent of U.S. electricity production.
After recording large gains over the past five years, solar stocks have recently stalled. “The sector is now seeing pricing pressure as cheap China panels flood the market and margins collapse,” observes Wilder. “In time increased global capacity to make panels may lead to some select stock winners, but now is not that time.”
Solar ETFs like the Claymore/MAC Global Solar Energy Index ETF (TAN) and Market Vectors Solar Energy ETF (KWT) have lagged the broader stock market by posting double digit year-to-date losses. Put another way, solar stocks have become a contrarian investor’s delight.