Exchange traded funds, or ETFs as they are commonly known, are investment funds that are traded on a stock exchange. Investors have a wide variety of ETFs from which to choose, from those that track a major market Index to ETFs that track a basket of foreign currencies. Another type of exchange traded funds are green ETFs, or those that focus on companies that support or are directly involved with environmentally responsible technologies, such as the development of alternative energy or the manufacturing of green technology equipment and devices. Today's investors have access to a growing number of green ETFs, allowing them to incorporate environmentally friendly strategies in their investment decisions.

What Is a Green Investment?
Green investing, whether it pertains to ETFs, mutual funds or individual stocks, refers to investment activity that focuses on companies whose business supports or promotes conservation efforts, alternative energy, clean air and water projects and other environmentally responsible business decisions. The majority of green ETFs focus on companies involved directly or indirectly with the research, development, production and providing of alternative energy. Companies may be distributors of alternative energy or may be manufacturers of parts and equipment needed to produce the energy, such as the photovoltaic cells necessary for creating solar panels. Each ETF has its own criteria for determining the eligibility requirements for assets.

Considerations in Defining Green
Many new businesses are able - with careful planning - to go green from the start. Established companies, however, with years or decades of bad habits have to work extremely hard to turn their routines into environmentally friendly practices. This can leave companies with one foot in the old school, environmentally irresponsible group, and the other foot in the modern, green movement. Automobile manufacturers are good examples: the same company that is making gas-guzzling SUVs might also be on the forefront of developing hybrid and electric cars.

So what makes a company or an ETF green? Currently there are no strict rules regarding which companies or investment instruments are officially "green." Many of the considerations are a matter of opinion. For example, some people consider nuclear energy to be a clean and green energy choice, while others would argue that the toxic waste precludes it from being environmentally responsible. In general, it is up to each investor to decide if an investment instrument is green by his or her standards.

Green ETFs
Although each investor must decide if an investment is green, there are a growing number of ETFs that are based on companies that are actively engaged in the research and development of alternative energy sources; namely broad clean energy, wind, solar and nuclear:

Broad Clean Energy ETFs
Broad clean energy exchange traded funds are involved in the alternative, renewable and clean energy sectors. ETFs based on broad clean energy include:

  • PowerShares WilderHill Clean Energy Portfolio (ARCA:PBW): This fund is based on the WilderHill Clean Energy Index and selects companies focused on greener and renewable energy sources and technology that facilitates cleaner energy. The fund has a large focus on holding small cap firms and implements a growth strategy investment approach.
  • iShares S&P Global Clean Energy Index Fund (Nasdaq:ICLN): This fund allocates its holdings to alternative energy including solar and wind, and to companies involved in biomass, ethanol and geothermal production. Its top sector is semiconductors and semiconductor equipment with additional exposure to the utilities sector.

Wind Power ETFs
Wind power converts wind energy into other forms of useful energy. Wind turbines are used to generate electricity, wind mills create mechanical power and giant sails can be used to provide thrust for ships. Energy production of wind power has increased, and more than 80 countries are using wind power on a commercial basis. ETFs based on wind power include:

  • PowerShares Global Wind Energy Portfolio (Nasdaq:PWND): This ETF tracks the Nasdaq OMX Clean Edge Global Wind Energy Index. The Index includes numerous international companies that are manufacturers, developers, distributors, installers and/or users of wind-powered energy sources.
  • First Trust Global Wind Energy (ARCA:FAN): This ETF is based on the ISE Global Wind Energy Index. A security component must be actively engaged in some aspect of the wind energy industry, such as the development of a wind farm, or the distribution of wind-generated electricity. Many of the holdings in this ETF are non-U.S. companies and as a result this ETF contains ADRs, GDRs and EDRs.

Solar Power ETFs
Solar power harnesses the sun's energy and converts it into electricity, either directly using photovoltaic cells or indirectly using concentrated solar power (CSP). Germany, Canada and Spain are among the world leaders for solar innovation. The price drivers for solar ETFs include oil prices (which are generally positively correlated); government subsidies and incentives and technological developments. ETFs based on solar power include:

  • Market Vectors Solar Energy ETF (ARCA:KWT): This fund aims to replicate the yield performance of the capitalization weighted index Ardour Solar Energy Index. Domestic and international corporations are represented with significant investments in China, the United States and Germany.
  • Guggenheim Solar ETF (ARCA:TAN): This ETF is based on an index (the MAC Global Solar Energy Index) that tracks companies involved in the production of solar power equipment, the production of fabrication products or services and companies that supply the raw materials that are utilized by the solar power equipment producers.

Nuclear Energy ETFs
Nuclear power is the product of controlled nuclear reactions, and accounts for a rapidly growing percent of global electricity. Despite historical drawbacks such as Chernobyl and The Three Mile Island, utilities and miners have begun to focus their resources on uranium and nuclear energy. ETFs based on nuclear energy include:

  • PowerShares Global Nuclear (ARCA:PKN): This fund is based on the WNA Nuclear Energy Index. Represented are globally traded companies that are engaged across multiple areas of the nuclear energy industry in reactors, utilities, construction, technology, equipment, service providers and fuels. The fund's holdings include those companies in the industrials, energy and utilities sectors.
  • Global X Uranium (ARCA:URA): This fund has a focus to replicate the after fee performance of the Solar Global Uranium Index. The fund's focus is on uranium mining, with a heavy weight on Canadian companies and capitalizing on the demand for the nuclear material.

The Bottom Line
This article highlights only eight of the many green ETFs that are available to today's investors. Others include (without descriptions):

  • PowerShares Water Resources Portfolio (ARCA:PHO)
  • PowerShares WilderHill Progressive Energy Portfolio (ARCA:PUW)
  • PowerShares Global Clean Energy Portfolio (ARCA:PBD)
  • PowerShares Global Water Portfolio (ARCA:PIO)
  • PowerShares CleanTech Portfolio (ARCA:PZD)
  • Market Vectors Global Alternative Energy ETF (ARCA:GEX)
  • Market Vectors Environmental Services Index (ARCA:EVX)
  • Market Vectors Nuclear Energy ETF (ARCA:NLR)
  • First Trust ISE Water Index Fund (ARCA:FIW)
  • First Trust Nasdaq Clean Edge Green Energy Index Fund (Nasdaq:QCLN)
  • Claymore S&P Global Water Index ETF (ARCA:CGW)

Interested investors can further research green ETFs by speaking with a qualified financial consultant.

Many green investments involve newer and smaller companies, which often equates to greater volatility and/or weak performance. That said, as these companies gain traction and the need for alternative energy is further realized and regulated, green investing will likely become an increasingly stable platform for investors.

The exchange-traded funds included in this article are examples only and do not represent any actual positions held by the author. The intention of the article is to introduce readers to green ETFs and not to make any inferences or recommendations regarding specific investments.

Related Articles
  1. Bonds & Fixed Income

    Green Bonds: Fixed Returns To Fix The Planet

    Fixed-income investors are no longer left out of the green investing revolution.
  2. Economics

    What Does It Mean To Be Green?

    Green investing is the new buzz word for companies and investors. Find out what it means.
  3. Personal Finance

    Forget Green Stocks, "Green" Will Do

    More and more companies are "going green", but that term, in itself, can be subjective.
  4. Entrepreneurship

    Can Business Evolve In A Green World?

    Learn how global warming is starting to heat up America's corporate climate.
  5. Options & Futures

    Spotlight On The Solar Industry

    Before you buy into the hype, learn how the industry works and how to spot the winners.
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  8. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Lion economies

    A nickname given to Africa's growing economies.
  4. Green collar

    A worker who is employed in an industry in the environmental ...
  5. Factor Investing

    An investment strategy in which securities are chosen based on ...
  6. Nasdaq-100 Pre-Market Indicator

    An index of trading activity based on pre-market open prices ...
RELATED FAQS
  1. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  2. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  3. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  4. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>
  5. Are there leveraged ETFs that follow the retail sector?

    There are many exchange-traded funds (ETFs) that track the retail sector or elements of the retail sector, and some of those ... Read Full Answer >>
  6. What are some of the most popular ETFs that track the retail sector?

    Some of the most popular exchange-traded funds (ETFs) that track the retail sector include the iShares S&P Global Consumer ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!