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The following headline appeared on the front page of the "Financial Times" on December 14, 2006. This story isn't going away.
"Bush told to break oil's hold on the U.S."
Concern over climate change, high oil prices, and energy security has spawned the introduction throughout the world of a dozen indexes (and funds to track them) advancing solutions, starting with the August 2004 launch of the WilderHill Clean Energy Index (ticker: ECO).
The development of alternative fuels and fuel cells is expected to play a critical role in global economic expansion in the years ahead.
Imagine a single security that allows you to buy the entire clean energy market, or fuel-cell industry – in just one stock. Exchange-traded funds (ETFs) are index funds which downplay stock picking in favor of buying the market. In this case, the alternative energy market.
Exchange-traded funds (etfs)
ETFs are a cross between individual stocks and index mutual funds, and they offer the best of both worlds. Each ETF is a basket of stocks. These baskets track anything from a broad-based market index to a designated country to a pinpointed economic sector.
Since your investment is spread over an entire sector, ETFs eliminate the need to identify the hottest companies or speculate on the newest technologies. And, because you’re buying a basket of stocks, you don’t have the risk of owning a single stock that may have a bad earnings report, an accounting scandal, or some other unexpected negative news.
The NASDAQ Clean Edge U.S. index, for example, provides a benchmark for investors interested in participating in a range of technology innovations, from advanced batteries and biofuels to solar power and energy efficiency. In January '07, this index will be available to investors.
ETFs trade instantaneously all day long and allow you to lock in a price for the underlying stocks immediately. This can be a huge advantage over mutual funds.
Clean energy indexes
Wildershares, LLC is an Index provider and the source for the WilderHill Clean Energy Index. Wildershares launched two new exchange traded funds in 2006--the PowerShares WilderHill Progressive Energy Portfolio (PUW) and PowerShares Cleantech Portfolio (PZD).
"The Progressive Energy Portfolio shifts the trend in a slight but significant way by focusing not on renewable energy or cleantech (as indexes and funds have tended to do thus far), but rather on technologies that help bridge the transition from dirty fossil fuels to clean renewables." - Social Funds.com
ETF investing made easy
Mutual fund holders have to purchase and redeem shares directly from the fund, which can cause capital gain distributions to all shareholders. But ETFs trade over an exchange, so transactions affect only a single shareholder. This saves ETF investors on taxes.
"Those investors looking to take advantage of tax losses and gains at the most opportune time will find that an ETF offers the flexibility to pick the time of these events, flexibility that mutual funds do not provide. Expense ratios of .20 or even lower are common with ETFs--compare that to mutual funds, whose average expense ratio is around 1.3 percent." - Social Funds.com
As with any trading activity, you want to monitor expenses. Charles Schwab charges $29.95 per ETF trade, E*Trade $19.95, and Ameritrade $10.99, while ShareBuilder* charges only $4 per trade.
* ShareBuilder actively promotes ETFs and provides excellent research for new investors.
Related articles and links
Two New ETFs Fight Climate Change..." - Social Funds.com
Visit www.cleanedge.com
ETF financial analysis: Green ETFs - how to choose?
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