Energy and Alternative Energy ETFs

Energy and Alternative Energy ETFs
Sunday July 30, 3:31 am ET
By Jonathan Bernstein, ETFzone Trading Specialist


Historically the alternative energy ETF Powershares Wilderhill Clean
Energy (AMEX:PBW - News) has traded in tandem with more traditional
oil- and gas-focused energy funds. But over the last three months this
has changed. While traditional energy ETFs has outperformed the market,
alternative energy fund PBW has sold off sharply. This recent
divergence may provide investors with an opportunity to diversify by
adding PBW to a portfolio of conventional energy assets.

The two charts below compare the performance of alternative energy PBW
with the more traditional Energy Select Sector SPDR (AMEX:XLE - News).
The first chart below compares the two on a 2-year basis. The second
chart below compares the two on a 3-month basis.







As the charts above show, PBW has fallen sharply over the last three
months. XLE is close to unchanged but still has outperformed market
benchmarks down 2-5% during this period.


Although technically they have demonstrated similar performance
(presumably because both benefit from higher oil), fundamentally the
energy and alternative energy industry as represented by XLE and PBW
have some key differences that impact performance.


First of all, XLE holds some of the largest companies in the world--
vertically integrated and diversified oil majors like Exxon Mobile
(NYSE:XOM - News) and Chevron (NYSE:CVX - News). By contrast PBW holds
some of the smallest companies held in any ETF, and some of the
smallest publically traded companies period. Two of PBW's top ten
holdings, Mechanical Technology (Nasdaq:MKTY - News) and UQM
Technologies (NYSE:UQM - News) have less than 100 million in market
capitalization. PBW holds many small companies. In fact, the combined
market cap of the top ten holdings in PBW is under 5 billion, and half
of that is from a single company, International Rectifier (NYSE:IRF -
News). By contrast, Exxon, the largest holding in XLE, has a market cap
of 400 billion.


Secondly, companies held in XLE are some of the most profitable and
cash-rich companies in the world, with Exxon for example earning about
10 billion a quarter lately. By contrast, most companies in PBW are
losing money, and on very little revenue.


Thirdly, PBW is invested almost entirely in highly experimental
technology-focused companies. While these small companies, like the oil
majors, stand to benefit directly from higher oil, even more important
for their success are probably regulatory changes, subsidies, and a
more global perception of the need for alternative energy solutions.


Clearly there are many risks associated with ownership of companies
primarily focused on the development of technologies for a
still-nascent sector, such as the kind held in PBW. For the gun shy,
one way to invest in alternative energy is to own oil majors such as
Exxon or other companies held in XLE, as many of these companies have
substantial alternative energy research investment.

In the current environment of decelerating growth, higher inflation and
war, a defensive growth sector fund like XLE with exposure to crude
clearly remains a core holding for investors. But high oil prices and
the increasing importance of alternatives to conventional energy
sources make the development of new technologies inevitable. An
right-sized investment in PBW at these levels makes a good complement
to a traditional energy portfolio.


Jonathan Bernstein has specialized in short-term trading of equities
and equity options since 1998. He is the author of a recent book on
ETFs: "Sector Trading: a Year in Exchange Traded Funds."

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