NEW ENERGY IN THE MARKETS

What does the falling price of oil mean for New Energy investments?

Historical note: The drastic drop in the price of oil in the mid-80s was one of the most important among the reasons New Energy growth stagnated until the early years of the present decade. (The drastic cut in New Energy R&D funding during the Reagan administration was another.)

Bottom line: The price of oil has an outsize influence on pricing in the New Energy sector.

It’s a slightly illogical proposition since oil fuels vehicles and most New Energies generate electricity for the power grid but it’s a rule-of-thumb widely accepted in the energy and financial communities.

Ed McRedmond, senior vice president (portfolio strategies), Invesco PowerShares Capital Management: “Obviously, people aren’t going to care as much about clean energy if oil is $10 a barrel…”

Is oil headed back down to the $10/barrel range? Extremely unlikely. But for the time being, consider every possibility to be on the table.

Most estimates have found most New Energies to be viable with oil in the $40-to-$60/barrel range.

A month ago, those numbers seemed antiquated. Now, remember this: The present has never become the past so fast.

Still interested in New Energy investing? A New York Times writer investigated Exchange Traded Funds (ETFs) dedicated to New Energy.

ETFs are specialized versions of mutual funds, less substantial, riskier, but – like mutual funds – a combination of companies so the investor is “hedged” against the vagaries of a single company. There are at least 16 ETFs covering New Energies. This year they have closely tracked the rise and fall in oil prices.

Solar and geothermal energy companies are widely represented in the markets. Investors require little guidance in finding them or ETFs that include them. Experts recommend ETFs for investing in solar and geothermal because New Energy remains for many a specialty not readily understood.

ETFs offer a special opportunity when it comes to wind energy investments because there are few wind companies publicly traded on U.S. markets. Wind power funds track wind energy companies around the world. 2 wind power ETFs opened up in the last 4 months. Because of wind’s record growth, the 2 funds quickly amassed $83 million in total assets.

Paul Justice, E.T.F. fund strategist, Morningstar: “You don’t want to own the second fiddle just because it’s based in the United States…”

One ETF, WilderHill, indexes and weights companies based on how important alternative energy is to each of them. Example: A small company entirely invested in New Energy (a pure-play) like VeraSun Energy (an ethanol company) gets a bigger place in a WilderHill index than a big company like Applied Materials (which makes, among other products, solar components).

Footnote: At least 3 ETFs advertising themselves as New Energy funds include nuclear energy stocks. For any investor for whom that matters, ask. (WilderShares excludes nuclear power companies.)

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Funds, Too, Are Mining New Energy Sources
J. Alex Tarquino, October 11, 2008 (NY Times)

WHO
Exchange Traded Funds (ETFs): First Trust ISE Global Wind Energy Index fund (FAN), PowerShares Global Wind Energy Portfolio (PWND), PowerShares Global Clean Energy Portfolio (PBD); WilderShares (Robert Wilder, founder/C.E.O.) and WilderHill Clean Energy Index

WHAT
ETFs offer New Energy investment options. There are at least 16 ETFs. Wind is included mainly in the newest ETFs.

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WHEN
- 2008: More than half of New Energy ETFs were created this year.
- Last 4 months: 2 wind power funds, tracking wind companies around the world, opened in the last 4 months

WHERE
- Many of the ETFs focus on a narrow area (solar or nuclear power or biofuels).
- Most of the big wind power companies, unlike solar and biofuels businesses, are based in Europe.
- WilderShares is based in Encinitas, Calif.

WHY
- ETFs share prices have slumped, as have the oil markets.
- First Trust ISE Global Wind Energy Index fund: $63+ million in assets since it began trading in mid-June. Down almost 55%. (Annual charge - 0.6%)
- PowerShares Global Wind Energy Portfolio: $20+ million in assets since it began trading in July. Down 51+%. (Annual charge - 0.75%)
- Three ETFs focus on nuclear: $200+ million in total assets since the first of them, Van Eck Nuclear Energy, began trading just over a year ago. Down 34% in the third quarter 2008, down 52+% inception in August 2007. (Annual charge - 0.65%)
- Three traditional mutual funds that focus on alternative energy are part of the Calvert, Guinness Atkinson and Firsthand fund companies.

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QUOTES
- Jeff Tjornehoj, senior research analyst, Lipper: “Essentially you are betting on which ones will get pushed around by oil prices the most…[But New Energy] might very well be the next big thing…[though] it could be a long time before any one of these technologies replaces oil,”
- Michael Herbst, lead natural-resources mutual fund analyst, Morningstar: “I don’t know of any mutual funds that are that granular yet…”