One day, "alternative" energy will just be "energy". I hate to borrow a line from a Calvert mutual fund advertisement, but the slogan rings true. Alternative firms will power our homes, run our vehicles and drive commerce. We, as a society, are using too many resources and all of the "easy" oil has been found, which makes the case for alternative energy. Now that we know oil can hit previously unthinkable highs of $145 a barrel, the likelihood that oil will creep up in the short-term is not far-fetched.

On Wednesday Oct. 29, ConocoPhillips (NYSE:COP) Chairman and CEO James J. Mulva said, "I think the oil price went up too quickly, too high, and now I think it's come down, you know, too quickly and too low." He feels prices should be around $80-90 per barrel. I feel, however, that oil will climb to even loftier heights over time.

As oil and natural gas prices rise, interest in green energy stocks gains momentum. As the prices fall, attention wanes. Given the current market conditions, those of us with long-term timelines and strong stomachs may want to nibble at the prospects of alternative energy. (Find out the benefits of companies engaged in the production of alternative energy or other green-related businesses by reading Can Business Evolve in a Green World?.)

Leave the Picking to the Pros
In the case of unconventional future energy sources, I am more than happy to leave the individual stock picking to professional money managers or, in this case, the index providers. Exchange-traded funds (ETFs) offer the best way to participate in the alternative energy market. These baskets of stocks offer investors much needed diversification because the renewable energy market is fraught with small cap growth stocks and start-up companies. These ETFs allow retail investors the opportunity to buy large swaths of the market without having to hone in on the winners.

As is the case for a large portion of specialized exchange-traded funds, many alternative energy ETFs have low trading volume. As a result, huge bid/ask discrepancies can appear, which cause a fund to skew from the underlying index. This defeats the basic tenant of low cost index investing. Individual investors should stick to the larger and better established renewable energy funds. (For more about index investing, check out the Index Investing Tutorial.)

A Few Starting Places
Most investors will find the best place to park their renewable energy dollars is a very broad-based fund. Invesco's PowerShares leads the pack with the largest and oldest ETF in the sector. The PowerShares Wilderhill Clean Energy ETF (AMEX:PBW) currently has most assets under management with $637 million. These assets include exposure to wind, solar, ethanol and geothermal sources of energy as well as energy efficiency and energy conservation companies. The fund's current 53 holdings provide investors a good mixture of market capitalization and investing style. Expense ratios for the fund are at 0.7%, which is in line with many other specialized exchange-traded funds. The fund currently is down year-to-date 65%, which could provide long-term investors a good entry point. It should be noted that the fund has gone through periods of drastically underperforming against the S&P 500 as well as periods where it beat it greatly.

The one real drawback to the Wilderhill Portfolio is that it is a domestic-based stock index. The Market Vector Global Alternative Energy ETF (NYSE:GEX) sponsored by Van Eck Global solves this problem. The ETF follows 30 stocks in the Ardour Global Index. This gives investors a chance to get involved with several domestic names, including Cree (Nasdaq:CREE) and Evergreen Solar (Nasdaq:ESLR). The fund also includes foreign renewable energy powerhouses such as Vestas Wind Systems and Gamesa Corp. The fund is slightly less expensive than PowerShares, with a ratio of 0.65%. It is also down more than 60% for the year.

Investors wanting to branch off into specific areas of the renewable green energy market also have a few choices. For a pure solar power play, the Claymore Securities-promoted Claymore/MAC Global Solar Energy Index ETF (NYSE:TAN) fits the bill. With 33 global stocks, the ETF runs the gamut of solar-based companies, with the United States only accounting for 27% of total assets. Average daily trading volume in the last three months is a healthy 200,000+. The fund is down 62% since its inception in April.

For a wind-based fund, PowerShares offers its Global Wind Energy Portfolio (Nasdaq:PWND). This index is composed of 33 global stocks engaged in the manufacture, development, distribution, installation and end usage of energy derived from wind sources. This fund includes General Electric (NYSE:GE), carbon fiber manufacturer Zoltek (Nasdaq:ZOLT) and utility company EON AG (OTC:EONGY). However, the fund is relatively new. With an inception date of July 1, it may take a while for a normalized trading pattern to develop. Global Wind Energy Portfolio is the most expense of the funds mentioned, with annual costs at 0.75%. The fund currently is down about 56% since inception.

Bottom Line
With the market in the current state of disarray and our economy's appetite for oil falling, it may be time to invest in renewable energy before the next run in commodities prices. The aforementioned exchange-traded funds offer long-term investors a way to position themselves in the sector.

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Tickers in this Article: PBW, GEX, PWND, TAN, COP, ZOLT, GE, CREE, ESLR

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