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Rob Carrick

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Go clean, invest green

Rob Carrick


Admit it, you’d be disappointed in the financial industry if it didn’t find a way to profit off of global warming.

It’s early days in the fight against global warming, but already there are four exchange-traded funds that offer a way to invest in clean and green companies, and more are on the way. If climate change continues to dominate the headlines like it has in the past few months, expect to see many more such investment opportunities appear in 2007.

There’s reason to be cynical about investment products rushed to market to capitalize on a trend. Remember technology and telecommunications funds back in 1999 and 2000? All kinds of mutual funds and ETFs suddenly became available and virtually all of them punished their unitholders when the tech market crumbled. The lesson of tech funds should not be lost on anyone considering clean and green ETFs, but let’s also remember that a lot of money was made in tech funds for those who got in early and were vigilant about protecting their gains when the market soured.

Global warming is hot right now, and clean and green ETFs are showing signs of following along. A report issued in February by a group of leading scientists was widely publicized for saying that the effects of global warming will last for 1,000 years, and that more storms, draughts and heatwaves are ahead. While governments dither about how best to address the situation, attention is turning to companies that may be able to provide solutions through clean sources of energy that don’t emit the carbon dioxide that is contributing to global warming.

This explains a modest little run-up in the share price of clean and green ETFs through the first seven days of February. The PowerShares WilderHill Clean Energy Portfolio (PBW-American Stock Exchange) rose 6.9 per cent, the PowerShares WilderHill Progressive Energy Portfolio (PUW-Amex) rose 6.7 per cent and the PowerShares Cleantech Portfolio (PZD-Amex) was up 6.5 per cent.

The PowerShares WilderHill Clean Energy Portfolio is by far the most popular of the five clean-and-green ETF as judged by daily trading volumes. The fourth, the Claymore/LGA Green ETF (GRN-Amex), is a virtual orphan that has gone days on end without trading a single share. The way to assess the attractiveness of these ETFs is by comparing their management expense ratios, the diversification of the stocks in the index that they track (ETF holdings usually mirror a stock index) and, last but not least, their trading volumes. Funds that trade lightly or infrequently should be avoided because they could be hard to unload at a decent price, especially if the clean and green sector falls out of favour for some reason.

The volume argument suggests that the PowerShares WilderHill Clean Energy Portfolio is an ETF to consider if you want exposure to companies that might profit from the fight against global warming. PowerShares, a big player in the U.S. ETF market, describes this fund as investing in the shares of companies that “focus on greener and generally renewable sources of energy and technologies that facilitate cleaner energy.” The largest holding is Zoltek Cos., which produces carbon-fibre materials for use in the rotor blades for turbine that generate electricity using wind power. The next two largest holdings are MEMC Electronic Materials Inc. and First Solar Inc., both of which are involved in creating efficient solar power.

The PowerShares WilderHill Clean Energy Portfolio scores well in diversification by spreading its holdings among a variety of sectors, including energy, healthcare, industrials and information technology, and by not betting heavily on a small group of individual stocks. In fact, not a single stock in the fund accounted for more than 3.85 per cent of the total as of early February. The MER for this fund is 0.60 per cent, which is typical for specialty ETFs.

Clean-and-green ETFs are a risky specialty investment, so limit the exposure in your portfolio to about 5 per cent and then be ready to both take profits and limit your losses in a downturn. There’s a lot still to be learned about global warming, and the same goes for investing in companies that stand to profit from it.

Rob Carrick has been writing about personal finance, business and economics for more than 12 years.

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