Can Green Energy ETFs Put Green In Your Wallet?

Remember a few years ago when “alternative energy” was all the rage? With crude oil trading at $150 and gasoline prices above $4 a gallon in many places, breaking free from our dependence on fossil fuels seemed like a good business opportunity.

As someone who greatly enjoys driving, air conditioning and electricity, I totally agree that it would be nice to diversify our energy sources. The question is: How to do it cost-effectively?

I believe the answer is to let free enterprise do its thing. Remove the artificial barriers, and the laws of supply and demand will lead us toward a good solution. Entrepreneurs will sort out the details.

Unfortunately, not every alternative-energy pioneer can succeed. There will be winners and losers. And investing in single stocks from this sector is a high-risk game. The good news is that you can get involved while staying diversified through exchange traded funds, or ETFs. Today I’ll tell you about some of them.

First let’s take a quick look at the different sources of energy …

Conventional Energy Sources

Fossil fuels are messy and expensive.

Fossil fuels: Good old-fashioned oil, coal, and natural gas provide the bulk of the industrialized world’s energy. We have the infrastructure already in place to find, produce and distribute this kind of fuel.

There are two problems, though. First, the easily-tapped reserves are running low. Second, the whole process is messy and unhealthy for people as well as the planet.

Nuclear energy: The secrets of the atom can also produce energy, and in many places atomic power plants go a long way toward meeting the demand for electricity. However, nuclear is not so great in transportation. You can’t run your car on uranium — at least not yet.

Hydro power: As long as water keeps running downhill, hydroelectric dams will be a good source of electricity, with relatively low environmental and safety risks. Like nuclear, though, hydro power is of limited usefulness when portability is required. What’s more, the best running-water sources have already been dammed.

That’s where we stand right now. Everything else is an “alternative.” So let’s take a look at …

The New Energy Sectors

Electric cars: The big problem is that batteries with enough juice to power a car are heavy. So heavy, in fact, that carrying them around often costs more energy than it saves!

The holy grail of the electric car industry, then, is the lightweight battery — one of the highest-potential but most elusive goals of the sector. Such things are being developed but are still very expensive. Most use a metal called lithium.

The Global X Lithium ETF (LIT) is probably the best and easiest way to tap into advanced battery technologies. Although this ETF has “lithium” in its name, the majority of its investments are in battery companies. Think of it as a “lithium food chain” ETF.

The sun won’t run out of energy anytime soon.

Solar energy: The sun is always there and doesn’t run out — or at least it won’t for a few billion years. Meanwhile we might as well tap into it.

Using sunlight to heat water is fairly simple; turning it into electricity is more complicated. New technologies are making the process a lot simpler, though. As this challenge is met, solar power could grow to provide much more than the fraction of our energy needs that it meets right now.

Currently two ETFs focus on solar energy: Claymore/MAC Global Solar Energy (TAN) and Market Vectors Solar Energy ETF (KWT). Both were launched in April 2008 and both are down about 70 percent from then. Solar energy may sound like a great idea, but it’s not yet a profitable idea for investors.

Wind energy: Remember when every farm had a windmill? They were handy for running the water pumps before electric lines made it out to the boonies. Now they’re just antiques.

What a change — now wind is the reason some farms exist. Oklahoma billionaire Boone Pickens has poured a ton of money into vast “wind farms” in the desert Southwest where huge windmills generate electricity.

Windmills: An old idea seeing new growth.

Wind energy has its limitations, of course. But it could still turn into a big business. Boone Pickens is no dummy about these things …

According to his Web site, his Mesa Power Group continues to pursue smaller projects throughout the United States and Canada through the American Wind Alliance, a cooperative formed with General Electric.

First Trust Global Wind Energy (FAN) and PowerShares Global Wind Energy (PWND) both target this alternative energy source, and like their solar cousins have not had much financial success. Wind energy is actually one of the worst performing industries of 2010. FAN and PWND are both down more than 30 percent so far this year.

Keep in mind that even if these ETFs are “green” for the environment, they may not necessarily put “green” in your wallet. Just like an old-fashioned gold rush, the alternative-energy rush is prone to hype and overconfidence.

This year most of the ETFs covering this sector have been hit hard, and it’s easy to start thinking that they look cheap. Are they a bargain at current prices, or are they only beginning to crash? I wish I knew the answer to that one. The “value investors” haven’t started buying them up just yet.

A somewhat less aggressive way to get into the alternative-energy group is with broader ETFs that don’t specialize in one niche like wind or solar. Alternative energy means different things to different people and as a result there is not just one index. Green, alternative, renewable, and progressive are among the monikers used to describe these funds.

Here are a few ETFs you may want to consider. But before you buy I suggest you dig a little deeper to see if they target the industries you want to own:

• PowerShares Wilderhill Clean Energy (PBW)
• PowerShares Global Clean Energy (PBD)
• Market Vectors Global Alternative Energy (GEX)
• PowerShares Wilderhill Progressive Energy (PUW)
• iShares Global Clean Energy (ICLN)
• First Trust Nasdaq Clean Edge U.S. Liquid (QCLN)

Nearly all the ETFs I’ve mentioned today are thinly-traded, so be sure to use limit orders when you buy or sell. Be cautious and know what you’re getting into.

Best wishes,

Ron

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