Alternative Energy ETFs Could Shine

By Kevin Grewal

Over the past year, the alternative energy sector has been hit hard by the global recession and cascading fall in crude oil prices.  However, as economies recover, crude gets a bit more expensive and alternative energy dominates political agendas, the sector is likely to reap some benefits.

Most recently, governments around the world came to an agreement to reduce carbon dioxide emissions by pledging an aggregate amount of $100 billion per year to aid developing nations in adopting cleaner and greener energy technology.  Additionally, nations like China, India and Brazil continue to focus and invest heavily in solar and wind power, with China expected to allocate more than $450 billion to the wind and solar power industries over the next 5 years.

In fact, the Chinese have more than augmented their support for alternative energy and solar projects by offering government subsidies.  To hit its goal of increasing total installed solar capacity to 2GW by 2011, the Chinese government offers 50% of the cost of investment in solar projects and 70% of the solar projects costs in remote parts of the country.

In the United States, the drive to cleaner energy seems to primarily be driven at the state and local levels.  Around the nation, twenty-six states and over a thousand cities have bumped up their environmental standards and energy efficiency requirements, with California leading the way.  The sunshine state has a statue which requires its utilities to include 33% renewable in its portfolio, which has resulted in Southern California Edison (SCE) and Pacific Gas & Electric (PGE) to both develop 250 MW solar projects.

To further add appeal to the sector, it appears that funding is no longer the barrier it once was.  Through the American Reinvestment and Recovery Act (ARRA), the U.S. Treasury Department has implemented a program which hands out cash grants in lieu of investment tax credits for renewable projects.  Additionally, the Department of Energy has implemented a loan guarantee program and developed new grants for use in commercial and residential energy efficiency programs. Thirdly, numerous states have developed bond programs like the Property Assessed Clean Energy (PACE) to make financing easier. Lastly, there are still the tax credits and utility rebates offered by the federal government, which add appeal to going green.

This focus on renewable and alternative energy sources will likely benefit the following ETFs:

  • Claymore/MAC Global Solar Energy (TAN), which holds companies like First Solar (FSLR).
  • PowerShares WilderHill Clean Energy (PBW), which holds companies like Trina Solar (TSL) and CREE Inc. (CREE).
  • iShares S&P Global Clean Energy Index (ICLN), which holds companies like Covanta Holding Corp (CVA).
  • Market Vectors Solar Energy ETF (KWT), which holds companies like MEMC Electronic Materials Inc (WFR).

When investing in these clean energy focused equities, it is important to consider the volatility of the energy sector and the inherent risks involved in investing.  To help mitigate these risks, the use of an of an exit strategy which triggers price points which represent abnormal price weaknesses and an increased likelihood that further price weaknesses are likely to follow is of importance.  Such a strategy can be found at www.SmartStops.net.

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