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Venture Capital Floods to Alternative Energy; ETFs Sprout

with 3 comments

Two interesting things from an article at–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.


Written by walonline

June 10, 2008 at 8:30 am

3 Responses

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  1. Thanks for the information. Me this theme too interests. I shall read still.


    June 10, 2008 at 2:06 pm

  2. These ETFs could be interesting to watch over the next few quarters. I guess my biggest question has to do with returns and what is in it for the investor aside from the warm fuzzy feeling of doing something good.

    What %s are we talking over how long( 9-10% an average, or the exception)? And, How does this middle man change the traditional VC relationship? It almost sounds like it’s more of a publicly traded company because you’re gaining more smaller investors, but do they have any say, does the ‘expert’ have any say? Maybe I missed something really basic here…

    Paul Prins

    June 10, 2008 at 5:10 pm

  3. Paul: Wikipedia has an entry on venture capital that does a good job at summarizing what it is. You can find the entry here.

    As for how an exchange traded fund can act as a sort of intermediary: it really isn’t. The VC is primarily used by a pre-IPO company.

    Those that have made initial offerings, however, may still be small and difficult to find. This is where the ETF comes in. By purchasing shares in the ETF, like you might a mutual fund, you hire an expert (the fund manager) to find the good companies for you.

    The value in the ETF is that your broker in many cases will take a cut of your mutual fund assets, but won’t take a cut of securities held in the form of stock. They also have continually (during the trading day) updated values, as opposed to a mutual fund, which calculates its value at the end of each business day.


    June 11, 2008 at 4:20 pm

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