A client recently asked me to look at clean energy mutual funds to consider adding to the satellite portion of his portfolio. (The satellite part is distinct from the core part of a portfolio and it holds investments that an investor thinks have the chance to outperform core investments. Often this is referred to as the “alpha” part of the portfolio.)
When I investigated clean energy funds, I found that there are both active and passive funds that invest in this arena and it’s very much a case of buyer beware.
- Most funds are less than 3-years old so it’s hard to know how they will act in more than one market cycle.
- They have very few assets so if the fund is actively managed, the fund manager needs to keep a fair amount of cash on hand to take care of any fund withdrawals; it it’s an ETF, the bid/ask spread tends to be larger.
- Performance is not very good compared to the S&P 500 Index. For example, the S&P 500’s average annual return over the last three years is -5.43%; the average annual return of the PowerShares Clean Energy ETF (symbol PBW) is -14.79%. One of the larger actively managed funds Winslow Green Growth (symbol WGGFX) has returned -13.84% over this time frame.
- And, of course, if you invest via an actively managed fund, the expenses are very high — 1.5% or more. The ETFs have expense ratios in the .6% range.
However, if you want to investigate one of the clean energy funds for the satellite of your portfolio, here are some to research:
Actively managed funds: ALTEX, GAAEX, WGGFX
ETFs: PBW, TAN, ICLN
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