HardAssetsInvestor

Written by Julian Murdoch  |

December 10, 2009

Under The Hood Of Alt-Energy ETFs

Details

All eyes are on Copenhagen this week as the world discusses how to combat global warming. Do commodity ETF investors have a play?

• A bright future for TAN?
• Wind's returns depend on Europe
• The good, bad and ugly of broad-based funds

 

TAN Vs. KWT: Solar ETFs Side By Side

Is the future sunny? On the opening day of the global climate summit, the market seemed to think so. Both the Claymore/MAC Global Solar Energy Index ETF (NYSE Arca: TAN) and the Market Vectors Solar Energy ETF (NYSE Arca: KWT) rose over 3 percent on Monday.

The two ETFs are very similar: Both have the same expense ratio (0.65 percent) and share the same companies in their top 10 holdings, differing only in the weighting. But year-to-date, TAN is looking better - and not just because of its cute ticker symbol:

 

 

That's because TAN's holdings are a bit more diverse, with its top 10 companies accounting for 56 percent of the fund's assets, as of Dec. 9. KWT, on the other hand, has a full 66 percent of its holdings in those top 10 companies. If the funds' underlying stocks had outperformed this year, you'd expect KWT's higher concentration in them to drive the fund to greater returns - but unfortunately, between the lingering financial crises and falling oil prices, solar energy had a rough 2009. And while some, such as Mark Pinto, chief technology officer and general manager of Applied Material's Energy and Environmental Solutions group, see the solar energy industry recovering over the next two years, solar hasn't exactly been a hot spot for alternative energy investors.

Therefore, TAN's diversity has paid off with substantially higher returns: The fund is now up 13 percent year-to-date, while KWT's has only returned 5.93 percent. Flows for TAN have also been good, with $68 million in net inflows year-to-date, as of Nov. 30; the fund's assets are now up to $182 million. KWT, in contrast, has attracted much less attention, with only $12 million in net inflows for the year; the fund now has $30 million in assets.

 

Comparing Wind ETFs

But the real action for alt-energy investors has been in the wind sector. Both ETFs involved in the wind sector have posted good returns for 2009; the First Trust ISE Global Wind Energy ETF (NYSE Arca: FAN) has risen 22.83 percent year-to-date, while the PowerShares Global Wind Energy ETF (NasdaqGM: PWND) has done even better, increasing 33.08 percent.

 

 

As with TAN and KWT, these two ETFs may seem very similar on the outside, but subtle differences in the holdings account for the discrepancy in returns:

 

Sector	FAN	PWND
Consumer Discretionary	0.70%	0%
Consumer Staples	0%	2.85%
Energy	5.93%	1.61%
Industrials	43.24%	49.76%
Materials	1.21%	2.11%
Utilities	48.78%	43.68%
Other	0.14%	0%
Top 10 Countries	FAN	PWND
Spain	25.24%	22.66%
United States	17.42%	8.99%
Germany	14.71%	12.16%
Denmark	8.05%	10.67%
Australia	6.15%	3.85%
Belgium	4.49%	3.48%
United Kingdom	4.47%
France	3.95%	16.02%
Japan	3.49%	6.91%
Guernsey	2.33%
China		4.73%
Hong Kong		2.85%

 

Unlike FAN, PWND has a higher weighting in China, which allows the fund to benefit from the country's recent stimulus package that invested heavily in infrastructure upgrades, such as electrical transmission lines. In particular, the China High Speed Transmission Equipment Group (HK: 0658) makes up 4.73 percent of PWND's assets, and only 0.99 percent of FAN's, which, given that the company is up almost 95 percent in 2009, makes a difference.

Furthermore, PWND's lower exposure to the U.S. dollar could only have helped its returns in a year when the greenback has fallen 7 percent year-to-date (as measured by the U.S. Dollar Index).

With its higher concentration in European countries, PWND is better positioned than FAN to take advantage of one of the early pledges of Copenhagen: the creation of a "super grid" in the North Sea to develop and distribute wind power. Should it come to pass, such an effort would likely rely more heavily on the Danes and the French than it would on the Americans, making FAN's 17.42 percent weighting in the U.S. irrelevant.