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DEFINITION of 'Alternative Energy ETF'

An exchange-traded fund (ETF) that invests in companies engaged in industries serving alternative energy production and research. Some companies found within alternative energy ETFs may only receive a portion of their revenues from alternative energy goods and services, while other (typically smaller) companies are wholly engaged in alternative or clean energy production. The underlying group of securities used to passively invest assets within these funds varies widely depending on the issuer. Some include many stocks while others have a narrower focus and are thus less diversified.

BREAKING DOWN 'Alternative Energy ETF'

ETFs focused on alternative energy stocks represent a strong "green" investment.  It's also an increasingly viable one, as countries and corporations pledge to power more and more of their activities with renewable energy, designed to invest broadly in securities that drive or depend on demand for particular kinds of renewable power. Alternative energy has two important tailwinds funding its growth: the limitation of the world's natural resources and higher demand by environmentally conscientious consumers. Wind and solar usage in the United States and China, the world's two biggest energy consumers, is already increasing steeply.

Nevertheless, most green industries, like wind, solar and hydro energy, are still in their technological infancies, and are still developing profitable business models. Therefore, investors should expect to see high volatility as certain processes and technologies rise to the forefront while others prove to be unsuccessful. ETFs are a safer option than trying to predict the fortunes of individual companies. 

Some alternative energy ETFs try to represent clean energy in its broadest sense by diversifying their holdings among many kinds of clean energy. These include the PowerShares WilderHill Clean Energy ETF (PBW), the S&P Global Clean Energy ETF (ICLN), the Nasdaq Clean Edge Green Energy Fund (QCLN), and Market Vectors' Global Alternative Energy ETF (GEX). Most of these funds were launched during a mid-to-late 2000's boom in alternative energy ETFs, and they tend to spread their holdings across wind, hydro and solar power, as well as investing in information technology and renewable electricity. Of these, the WilderHill fund is the oldest (launched in March of 2005 by Invesco) and at just under $110 million, has the most net assets.

Many other alternative energy funds focus on specific alternative energy industries. In terms of net assets, the biggest alternative energy fund in the world, as of 2016, is the Guggenheim Solar Energy ETF (TAN), launched in 2008. One of the best options for wind energy is the ISE Global Wind Energy Index Fund (FAN).

Investors looking to gain a stake in clean or alternative energy sources should keep a close eye on developments in the energy sector; technologies are constantly changing, and every year brings new opportunities for investing in clean energy.

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