Tom Konrad, Ph.D., CFA
Most investors looking to get into clean energy think first of mutual
funds. Here are the options, and how to choose.
We track seven mutual
funds with a focus on green energy and climate change at AltEnergyStocks.com,
since the American
Trust Alternatives Fund closed early this year. I split them into two
categories: the funds with a primary focus on clean energy, and those with a
primary focus on the environment.
The clean energy funds are: the Firsthand
Alternative Energy Fund (ALTEX), the Guinness
Atkinson Alternative Energy Fund (GAAEX), and the Calvert
Global Alternative Energy Fund (CGAEX/CGACX). The environmental funds are
the Allianz
Global Eco Trends Fund (AECOX), the DWS
Climate Change Fund (WRMSX), the New
Alternatives FD Inc (NALFX), and the Winslow
Green Growth Fund (WGGFX).
Since carbon emissions from energy use are the major driver of climate
change, there is a large overlap between the strategies of the environmental
funds and energy funds, but there are still meaningful differences. First,
while energy
and water are closely linked, the clean energy funds seldom have any
investments in water infrastructure. In contrast, the environmental funds
not only have significant investments in water, they also invest in environmental
clean-up and waste management to a much greater extent than the energy funds.
Fund Holdings
Below is a breakdown of these mutual funds’ holdings, based on the mutual
funds’ own classifications or my classifications of the stocks in their
portfolios, depending on what information I was able to find using Morningstar
and the funds’ sponsor web pages.
The sector breakdown shown here is only approximate for AECOX
and WRMSX,
because I was only able to find the top ten holdings of each of these funds, and the industry break-downs published by these funds do not differentiate
between types of alternative energy.
After the significant allocations to water infrastructure and environmental
cleanup among the environmental funds, the most noticeable difference between
these two groups of funds is the allocation to solar energy. This also
makes sense given the two groups’ focus. There is little argument that
solar has great potential to provide a large proportion of the electricity that
society needs. However, the current potential for solar power to
significantly reduce carbon emissions from energy production are limited by the
current high cost of the technology. That will change as the cost comes
down, but until it does, investors interested in reducing harmful greenhouse
gasses will be much more effective if they place their investments in
efficiency, wind, or forestry.
In short the choice between the environmental group of funds and the clean
energy group should rest on your goals as an investor. Investors who are
most interested in preserving the environment for future generations will prefer
funds from the environmental group, while investors looking to profit from the
transition to clean energy will prefer funds in the clean energy group.
Costs
Investors should also consider cost when looking at any investment.
Below is a chart of the costs of investing in each of these funds, with the data
from Morningstar.
An investor pays the front-end load just to make an investment in fund that
have them. Larger investments may reduce the percentage front-end load from
those shown. The expense ratio is the percentage of the investment which
goes to pay the mutual fund’s expenses every year. Institutional expense
ratio is the expense ratio paid by 401(k) plans and other institutional
investors which the fund grants a discount in return for a large amount of
business. The Calvert fund offers both "C" shares (CGACX),
with no front-end load but a higher annual expense ratio, and "A"
shares (CGAEX),
with a front-end load but lower annual expenses.
If you can invest in any of these funds through a 401(k) or other sponsored retirement
plan (as opposed to an IRA), you will generally be paying the institutional
expense ratio. As an individual, you will generally have to pay both the
front-end-load (if any), and the ongoing annual expense ratio.
In general, these expenses are all very high by the standards of mutual
funds. Because
of these high costs, I generally recommend investing in a green
energy Exchange Traded Fund(ETF), rather than a green energy mutual
fund. I’ve shown the approximate cost of investing in a green energy ETF
on the same chart for comparison. I will publish an article comparing
the green energy ETFs here in the next few days. (The link will be broken
until then.)
The Best Green Mutual Funds
If you still prefer a green mutual fund despite the cost, the best choice
among the environmental funds is clearly the Winslow
Green Growth Fund (WGGFX). The lack of front-end load for this fund
means that an investor in the New Alternatives fund (the only environmental fund
with a lower annual expense ratio) would have to wait 15 years before the lower
annual expenses were enough to pay back the high up-front cost.
Among the clean energy funds, I think the Guinness
Atkinson fund (GAAEX)
is the least unappealing. While its expense ratio is still a high 1.69%,
it has no front-end load, and even this high annual expense ratio is lower than
the annual expenses of the other clean energy focused funds. I also prefer
the Guinness Atkinson fund to the First Hand fund because of the more diverse
portfolio. Solar is the most volatile of green energy sectors, and ALTEX’s
large allocation to solar means that an investor in the fund gains fewer
benefits of diversification than an investor in GAAEX.
However, most investors who have the option will be better
off in a green energy ETF than a green energy mutual fund.
DISCLOSURE: GAAEX is an advertiser on AltEnergyStocks.com;
user sign-ups through Morningstar link may earn referral fees for
AltEnergyStocks.com.
DISCLAIMER: The information and trades provided here are for informational
purposes only and are not a solicitation to buy or sell any of these securities.
Investing involves substantial risk and you should evaluate your own risk levels
before you make any investment. Past results are not an indication of future
performance. Please take the time to read the full disclaimer here.