Clean energy has been on fire so far this year as solar, wind, battery, and renewable fuel companies continue to make inroads against traditional oil and gas conglomerates.
Companies such as Tesla Motors Inc (NASDAQ:TSLA) are striving to make the concept of clean energy available to mainstream consumers and appear to be succeeding on many fronts.
The adoption of clean energy technology on a worldwide scale is continuing to expand at a rapid pace and investors now have many options at their disposal. While some might choose to follow a handful of individual stocks, I have found that highly liquid and diversified ETFs offer a much better view of the overall industry.
Cloudy Days For The Biggest Solar ETF
A discussion of the clean energy sector almost always starts with the Guggenheim Solar ETF (NYSEARCA:TAN), which is the largest ETF by asset size with more than $450 million under management. TAN tracks 29 companies engaged in the production, installation, and fabrication of solar equipment for both residential and business use.
Top holdings in this ETF include well-known names such as Sunedison Inc (NYSE:SUNE) and Solar City Corp (NASDAQ:SCTY). However, one of the largest positions is in a somewhat suspect Chinese stock — Hanergy Thin Film Power Group Ltd.
Aaron Jackson, a market technician that I respect immensely, recently did some analysis of this company that pointed out various hidden dangers. Subsequently, Hanergy underwent a massive drop that significantly re-priced TAN’s net asset value amid a heavy spike in volume.
The move in Hanergy is either going to trigger the company being removed altogether or rebalanced to a significantly diminished capacity in TAN. Rebalancing typically occurs at the end of the quarter, which is still several weeks away.
My advice is to let the dust settle in this ETF before looking to play it in either direction. There are too many unknowns at this point to speculate on a probably outcome.
If you do decide to invest, keep in mind how swiftly these stocks can move (in both directions) and adhering to a strict sell discipline to prevent large losses.
Other Ways To Play The Clean Energy Theme
Click to Enlarge Another fund that takes a broader view of green energy is the Market Vectors Global Alternative Energy ETF (NYSEARCA:GEX). This ETF contains 30 solar, wind, battery, and industrial companies. TSLA is the top holding in GEX with 11.5% of the total assets.
This ETF has risen 19% so far in 2015 and carries a far broader exposure to foreign countries. GEX is primarily allocated to the United States with 60% of its assets, followed by China with just 12%. That heavier U.S. focus has stunted gains versus TAN this year, yet may offer a more conservative and balanced index overall.
Click to Enlarge Lastly, the First Trust NASDAQ Clean Edge Green Energy Index Fund (NASDAQ:QCLN) offers exposure to companies developing new clean technologies and renewable energy. This fund takes a similar approach as GEX in allocating to a broad mix of 46 stocks spread across multiple sectors and industries.
QCLN has gained 14% so far this year and is composed solely of small and mid-cap stocks based in the United States. The lack of international exposure in this ETF offers a variant way to play the clean energy theme with a strictly U.S. focus.
The Bottom Line
Investing in niche sectors such as solar or clean energy offers a higher degree of risk than more traditional broad-based ETF. Nevertheless, this may be appealing to those that want to add a small allocation of their portfolio to a top momentum area of the market.
If you do decide to invest, I recommend doing so with a risk management plan that defines your boundaries in the event the tide turns.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. To get more investor insights from FMD Capital, visit his blog. As of this writing, he held no positions in any of the aforementioned securities.