What Is Behind The Recent Clean Energy ETF Surge? - ETF News And Commentary

The clean energy space was recently fueled by a slew of good news that drove the pack higher. First came a new move in Obama's ‘climate change action plan' and then came a pact between Solar City SCTY and Groupon GRPN along with reports of 79% higher installation of solar panels in the U.S. in the first quarter (read: Clean Energy ETFs: The Real Bull Market?).

New Move in Climate Change Act

President Obama's environmental plan now includes an astounding target of one third of greenhouse-emission reduction over the coming 15 years.  The proposal is expected to be approved next year.

The plan calls for a 30% drop in carbon emissions by 2030 compared with the 2005 levels in a move to fight fast-increasing global warming worries. While Obama wanted the states to put forward their plans by June 2016, the new draft reveals an extension to 2017 and 2018 for states willing to join the clean energy drive.

Soaring Solar Space

A major growth area in the renewable space is solar energy. Thus, any favorable news on solar ETF perks up the entire space. In late May, SolarCity – the largest U.S. residential solar installer – teamed up with Groupon to form one of the first online offers of its kind for solar systems, a new way to sign up more customers in the increasingly competitive rooftop solar market. This deal will undoubtedly push the reach of the evolving solar industry.

Moreover, the demand scenario is shaping up well for the sector as evident from the stellar Q1 installation number. According to an analyst, total solar panel installations will likely hit 6.6 gigawatts this year, thanks to the increased demand from residential rooftop systems and more than 12 gigawatts of work-in-progress utility projects. Due to this bullish trend, Guggenheim Solar ETF (TAN) and Market Vectors Solar Energy ETF (KWT) added about 15.8% and 9.9%, respectively, this year. 

A number of solar power stocks came up with accelerating earnings this season. First Solar FSLR, Solar City and China's second-largest Trina Solar TSL all have exceeded both on top and bottom lines (read: Solar ETFs Shine on Trina Solar Earnings Beat).

Though the recent levy of import duties on Chinese solar panels and related products by the U.S. will likely escalate tensions between the two nations, we believe broader market trends will be unscathed.

Bullish Industry Projection

According to EIA, total consumption for renewables of electricity and heat generation will increase by about 3.3% in 2014. Demand for Hydropower is estimated to expand 2.9%, while non-hydropower renewables will likely rise by 3.6%.

EIA also projects that wind power capacity will grow 9.0% in 2014 and 15.5% in 2015. Coming to solar energy, EIA expects utility-scale solar capacity to expand 56% between 2013 end and 2015 end in the U.S. (read: Will the Clean Energy ETF Surge Continue in 2014?).

World-wide Push

Not only in the U.S., activity is also building up in other nations like China and Japan. China has already made a name for itself in this field. After the Fukushima disaster in March 2011 that stymied its nuclear power industry, Japan has also shifted focus toward renewable energy options.

ETF Impact

Still, clean energy investing is quite risky, and especially so from an individual security perspective. For this reason, a clean energy ETF approach is worth a look, as this still allows investors to gamble on clean energy but with a more diversified and risk-efficient technique, such as with the funds outlined below:

First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN)
 
This fund tracks the Nasdaq Clean Edge Green Energy Index and manages assets worth $137.5 million. It charges 60 bps in fees per year while volume is light suggesting a wide bid/ask spread.
 
In total, the product holds 50 securities in its basket with the largest allocations to Linear Technology, FSLR and Tesla Motors. These firms combined make up for 23% of total assets indicating high concentration risks. From a sector look, technology firms dominate this ETF, accounting for nearly two-fifths of the assets while oil & gas, and industrials round out the next two spots.
 
QCLN is up 3.52% in the year-to-date time frame and it has a Zacks ETF Rank of 2 or ‘Buy' rating with a ‘High' risk outlook (read: 3 Incredible ETF Buys Under $20).
 
First Trust ISE Global Wind Energy Index Fund (FAN)

For a concentrated play on the wind power industry, FAN may be an excellent choice. The fund looks to track the ISE Global Wind Energy Index. This benchmark provides exposure to roughly 46 companies, charging investors 60 basis points a year in fees.

The ETF focuses on companies that are exclusively positioned in the wind power industry, though it also takes into account firms that hail from the space but are not entirely dependent on it for revenues. This small cap heavy fund is basically a play on Europe and Asia Pacific markets, leaving just 11% for the U.S.

Vestas Wind Systems A/S is the major holding of the fund making up 11% of the portfolio while Nordex SE (8.54%) and Iberdrola S.A. (7.40%) round out the next two spots. FAN has also surged this year, adding 16% so far. FAN has a Zacks ETF Rank of 3 or Hold rating.
 
PowerShares Global Clean Energy Portfolio (PBD)

This product provides global exposure to the stocks that focus in on a cleaner energy space. It can be done by tracking the WilderHill New Energy Global Innovation Index. Holding 105 stocks in its basket, the fund is widely spread out with no single security holding more than 1.96% of PBD.

The product is skewed toward industrials and technology with over 32% share for each, while utilities also gets a sizable share. In terms of countries, the U.S. makes up about one-third of the portfolio, followed by China (14.5%) and Germany (6.0%). PBD charges 81 bps for this exposure. The product has been able to manage assets worth $100.9 million.

The ETF gained nearly 10.2% year-to-date and has a Zacks ETF Rank of 3 or ‘Hold' rating with a ‘High' risk outlook.

Bottom Line

Many securities in the green energy world are high growth in nature and were thrashed in the recent momentum sell-offs. Also, Chinese slowdown gnawed down on the space. However, with the U.S. markets trying to return to normalcy and China taking baby steps toward broad-based economic improvement, the space should move north in the coming days, making the aforementioned funds solid picks for clean energy-focused investors.

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SOLARCITY CORP SCTY: Free Stock Analysis Report
 
GROUPON INC GRPN: Free Stock Analysis Report
 
NASDAQ-CL EDG G QCLN: ETF Research Reports
 
FT-GLB WIND EGY FAN: ETF Research Reports
 
PWRSH-GLB CL-EY PBD: ETF Research Reports
 
GUGG-SOLAR TAN: ETF Research Reports
 
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