New Firm to Develop Algae-Based Fuel

A new company called AXI, LLC is looking to develop next-generation algae that makes the production of biodiesel more economical. Specifically, the company looks to algae as

[having] the potential for producing vast quantities of biostock for conversion into biofuels for transportation and heating. Our proprietary methodology for developing specific growth and productivity traits will help any algae production system improve its output of inexpensive, oil-rich algae as the raw material for the production of biofuel.

Further information about the company, as seen on AXI’s company profile is as follows:

AXI is a University of Washington spin-out Company created in partnership with the founders, the University and Allied Minds, Inc.  Allied Minds is a seed investment company creating partnerships with key Universities to fund corporate spin-offs resulting from successful early stage technology research.

This is interesting, as I have documented that algae may be one of the most promising “alternative” energy source in development (see prior posts “Algae Based Biofuels Are The Future“, and more recently “Alternative Fuels“).

Also, it is an example of the type of firms that venture capital has been flooding to, as I discussed in a June 10th post.

Lazy Portfolio Example

We’ve talked in the past at Office Rumors of how you might use ETFs to create your own “lazy” portfolio. Index Universe has a perfectly simple example (links added):

• 51% U.S. Equities (41% SPY, 10% QQQQ)
• 39% Foreign Equities (25% EFA developed markets, 14% EEM emerging markets)
• 10% Gold (GLD)

Maybe use Oil (USO) instead of Gold? Or even a broad commodities ETF? Either way, the expense of this portfolio is a razor-thin .28%. That’s better than you’d get on the vast majority of mutual funds, or anything through a full service broker.

Disclosure: At the time of publishing this post, I do not own any of these securities.

Two Bits on ETFs and Mutual Funds

It is nice to be back. I’ve been taking care of some personal stuff over the past few days. That said; let’s look at a few articles that have caught my eye since Friday.

First, while you are busy funding your IRA or 401k, your broker and the mutual funds take cuts out of your investment. The hope is that they can exceed this in the overall growth of your investment. Sometimes they may swing for the fences, leveraging themselves to the hilt (the case with many hedge funds), and miss. Greg Wolper at Morningstar wrote yesterday about a different situation: how fund managers (aka “Smart Money) can–for lack of a better term–get into bed with the companies they’re buying.

Specifically, he points to the case of Cerberus’ investment in GMAC, Chrysler, and others (see articles from the Financial Times here). While regulators are stepping in here, what can the average investor do? Is there any way to determine the strategy of a fund manager and to insure they are going about their business professionally? The Wall Street Journal has an occasional report on mutual funds that features fund manager commentary. These managers are the statistical anomalies, though, with returns (generally) well above average.

From this, the author moves to ask the question of how the average investor can determine the strategy of their fund managers. If it is a follow-the-leader strategy, the fund manager is probably slightly behind the returns on the index tracked by the fund. (See any fund’s prospectus for this information. It should be plainly spelled out.) Also, look at the fund management’s descriptions of the market environment of the fund. These are often found on the fund’s website. For example, here is one for Annaly Capital Management, Inc. (a REIT). Red flags should go up if the manager (or management) cannot explain what they are doing based on current conditions with a reasonable degree of clarity. Managers won’t tell you that they’re buying something on the basis of what a friend said, but it should be of some comfort that they are able to marginally sell you on it.

The second article comes from Index Universe, where Matthew Hougan writes on what ETFs really bring to investors. After a bit of discussion, he narrows it down to two things:

1. Tax efficiency, and
2. Easy access to high-caliber investments in new asset classes.

Easy examples of number two are the United States Oil (USO) and other ETFs previously mentioned on this site (see links below). Hougan gives a more exhaustive list as well:

Today, you can buy the entire stock market for 7 basis points, and you can also buy into commodities and real estate and timber. You can buy Treasuries, and you can also buy global TIPS, sophisticated quant strategies and buywrite funds. You can buy currency exposure, and you can also get leverage, sell short without using a margin account and tap into the carry strategy.

And the author means YOU, the independent investor that doesn’t have the millions required to invest in complex securities, hedge funds or venture capital. Now we just have to figure out how to invest in them properly!

Disclosure: at the time of publishing this, I do not own any securities specifically mentioned in the post.

Also, thank you to all the visitors looking at my posts on ETFs (especially here and here). If you have any questions, comments or ideas to add to the discussion, please offer them up!

Venture Capital Floods to Alternative Energy; ETFs Sprout

Two interesting things from an article at ETFguide.com–venture capital is flooding to alternative energy to the tune of $571 million in Q1 ’08, and following this trend, for more casual investors, ETFs have popped up from various fund families. First, here’s the key bit on the venture capital:

According to a recent Ernst & Young report using data from Dow Jones VentureOne, $571.6 million of venture capital was invested in 34 clean technology companies during the first quarter of 2008. A significant portion of investment was focused on alternative fuels ($178 million), energy/electricity generation ($148.3 million), and energy efficiency ($116.4 million).

A number like $571 million is not really even the start of this stuff. Let’s compare it to one of the largest companies in the world, a member of “big oil” (hiss hiss). Exxon Mobil (XOM) has $470 billion in market capitalization. That doesn’t even count any leverage/liabilities from lenders. Chevron, BP, and Shell all have more than $200 billion. They also have billions of dollars in working capital.

My point here being that alternative energy, combined with the entire green movement, should continue to expand. In addition, the high prices of oil and electricity should help them upward. This sector has had issues recently because energy prices weren’t high enough to have people consider alternatives (good feelings from helping mother earth don’t apply for the entire market).

There have been many talks of bubbles at this point, but there aren’t enough good public companies to push this. There has to be value initially for a bubble (although not much), and it doesn’t seem to be there, yet. Growth along these lines, because of the nature of energy, and its infrastructure-heavy requirements, should give us a period of broad steady growth after an initial capital intensive startup.

In the volatile market, one thing is for certain–political movements the world over for environmental-based taxes and programs will effectively increase demand for these “green” services. CNBC reported in April that the average for clean energy stocks was off. I’m willing to write off that as mostly market volatility and a downward trend market-wide. Even as far back as November, MSN Money was talking about a green bubble. Again, I would reiterate: its just getting started. Energy costs have to rise to a point that it becomes valuable for people to look at alternatives.

Back to the article–most of us don’t have access to start-ups or enough money to qualify us to receive venture capital offerings. The availability of new ETFs lets the common person invest in companies that have made public offerings, so they’ve been around a little longer than the “start-up”. Also, it allows an expert (who you pay through gains in capital) to choose them for you. Whatever your strategy, there are many different types available, as ETF Guide documents (links in the block are from the original website):

The range of investment strategies are a broader industry sector approach, with ETFs like PowerShares WilderHill Clean Energy Portfolio Fund (Ticker: PBW) or PowerShares WilderHill Progressive Energy Portfolio Fund (Ticker: PUW). Each of these funds cover a range of emerging technologies like biofuels, wind power, hydroelectricity, geothermal power and solar energy.

The other strategy, which is more aggressive, is to make sub-sector bets that focus exclusively on a specific niche of alternative energy, like Solar (Ticker: TAN) or Nuclear Power (Ticker: NLR).

Top performing areas so far this year include the PowerShares Global Nuclear Energy (Ticker: PKN) ahead by 10.5 percent, the Claymore MAC/Global Solar Energy (Ticker: TAN) up 9.3 percent, and the PowerShares Progressive Energy (Ticker: PUW) advancing 2.1 percent.

Alternative energy ETFs generally charge annual expenses between 0.60 to 0.75 percent.

Make sure the expense ratios work with each fund’s probable growth, to ensure you’re not burning away any profits. Also, as with any investment, understand what its components are (know the stocks an ETF holds significant portions of, or mutual fund for that matter).

These might be a nice option for those that want a riskier investment in their portfolio, but would choose a simple stock. Instead, this allows you to diversify within a specific area (as laid forth in the fund’s prospectus) for relatively low cost. Again, this simply adds to the options set forth in previous posts of mine, and elsewhere.

Disclosure: I do not own any security listed in the post.

Wind ETF Good Investment?

An article by Tim Beyers from a few years ago asks some very good questions with regards to focused ETFs such as the Wind ETF that I mentioned on 5/28. The key points can be quickly summarized as:

1. Know the composition of the security. Are there companies held by the ETF that are bleeding money like a sieve?
2. What is its expense ratio? With index investing, ETFs are great because the indexes are reallocated electronically, so the expenses are low. In other words, you’re not paying an expert to throw his darts at the board instead of yours.
3. Who runs the ETF? Are they reputable/trustworthy? There’s nothing worse than giving your money to some dunce.

As a rule of thumb, any investor should be using this advice for any investment. You don’t want to risk your money without balancing it with a reasonable chance of earning a return on that risk. Otherwise, you may as well head to the card table at your local casino.

Read Beyer’s entire article here.

New Wind ETF

First Trust has registered a new ETF that will invest in the wind energy industry (based off the ISE Global Wind Energy Index), which is the first of its kind. This would be an interesting green play, because owners would get a pure wind energy play. I don’t follow the industry at all, but the expansion of green power producers based upon the US energy policy and the national political situation today would lend themselves to a good investment. Especially, because states like Texas (among others) heavily subsidize the production of wind turbines.