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November 02, 2006
Two New ETFs Fight Climate Change: One Bridges Shift to Cleaner Energy, One Pushes Cleantech
    by Bill Baue

The PowerShares WilderHill Progressive Energy Portfolio and the PowerShares Cleantech Portfolio offer investors increasing choice for investing in climate change solutions.


Concern over climate change, high oil prices, and energy security has spawned the introduction throughout the world of a dozen indexes (and funds to track them) advancing solutions, starting with the August 2004 launch of the WilderHill Clean Energy Index (ticker: ECO). This trend continued last week with the launch of two new exchange traded funds (ETFs)--the PowerShares WilderHill Progressive Energy Portfolio (PUW) and PowerShares Cleantech Portfolio (PZD). The progressive energy portfolio shifts the trend in a slight but significant way by focusing not on renewable energy or cleantech (as indexes and funds have tended to do thus far), but rather on technologies that help bridge the transition from dirty fossil fuels to clean renewables.

"Having created the first index and fund for clean renewable energy and after working with partners to create a global clean energy index, I felt frustrated by a space that was still left unfilled," said Rob Wilder, founding CEO of WilderShares. Dr. Wilder publishes the ECO index that the PowerShares WilderHill Clean Energy Portfolio (PBW) tracks and the WilderHill New Energy Global Innovation Index (NEX). "There should be an index and fund that capture opportunities for decarbonizing the present energy portrait and for making much better use of the inherently dirty fuels that still dominate today."

"If we are to address global warming seriously, we need to take action on fossil fuels and soon," Dr. Wilder told SocialFunds.com. "How well we do that indirectly impacts the sustainability of our future energy portrait."

Dr. Wilder thus created the WilderHill Progressive Energy Index (WHPRO) that the new ETF tracks, focusing not on the end-goal of energies with zero carbon emissions but rather on the near- and mid-term goals of decreasing current carbon emissions. The index is not completely novel--in July 2005, KLD Research & Analytics launched the KLD Global Climate 100 Index. It focuses on the entire chain of solutions to climate change, from transitional fuels such as natural gas and hydrogen to renewable energy. However, the only investment product based on this index, the Global Warming Prevention Equity Fund, is available only on the Japanese market.

Backtesting of the WHPRO index showed significant outperformance over the past five years ending September 30, 2006, as it generated 18.22 percent annualized growth compared to 8.55 percent for the NASDAQ and 6.97 percent for the S&P 500.



The WHPRO index and PUW ETF focus on sectors such as alternative fuels, emissions reduction, efficiency, and innovation in energy materials, production and use. Interestingly, the index and fund specifically exclude investment in zero-carbon and renewable energy.

"There is a good non-correlation between this newest index/fund and all the others from WilderHill," said Dr. Wilder. "Generally there is zero overlap of component stocks in WHPRO/PUW and ECO/PBW in any single quarter."

"Moreover, there is generally less volatility in WHPRO than ECO, in part because stocks in WHPRO are much larger--typically over $400 million in market capitalization," he added.

Large companies in the new index and ETF include Toyota (TM) for producing hybrids, Honda (HMC) for fuel efficiency, Johnson Controls (JCI) for building control and automotive systems, and United Technologies (UTX) for conversion efficiency and fuel cells. Many socially responsible investing (SRI) funds screen out United Technologies as a military contractor.

While ECO/PBW screen out nuclear power, WHPRO/PUW do not employ this screen, as nuclear power is considered by some to be a valid transitional energy that reduces carbon emissions. The fact is that nuclear power is here and is not going to go away in the near future.

"There are those in our government and governments around the world that are strongly committed to the concept that if we don't have a commercial use for nuclear power, we're left only with a military use, and that's unacceptable," said Mike Eckhart, president of the American Council on Renewable Energy (ACORE), at the Green Mountain Summit on Investor Responsibility. "Therefore there will be a civilian use of nuclear power."

"Alternative energy firms with exposure to nuclear power may be included, but current nuclear power is not a priority; next-generation nuclear may be considered if it is safer," Dr. Wilder said.

WHPRO/PUW holds Wisconsin Energy (WEC) due to its relatively lower carbon output achieved in part by its operation of Point Beach Nuclear Plant in Two Rivers, Wisconsin.

The top two portfolio holdings address emissions reduction. Tenneco (TEN) produces automotive emission controls, filters, and catalytic converters, and Headwaters (HW) produces emissions reduction technologies for coal.

The Cleantech Index (CTIUS), which the PowerShares Cleantech Portfolio tracks, holds Headwaters as well as other constituents of WHPRO and PUW, such as Vicor (VICR), Power-One (PWER), On Semiconductor (ONNN), and Hexcel (HXL). However, it also holds many companies contained in the WilderHill Clean Energy Index, such as Amer Power Conversion (APCC), Sunpower (SPWR), Ballard Power Systems (BLDP), Medis Technologies (MDTL), and Energy Conversion Devices (ENER).

In this sense, the PowerShares Cleantech Portfolio represents a condensed, one-stop version of the portfolios based on WilderHill indexes. However, holding both the WilderHill index-based ETFs offers a higher degree of diversification. The key for investors is the fact that they now have greatly enhanced choice over how to financially support and harness these various solutions to climate change, rising energy prices, and energy security.

 

 
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