What is an Alternative Energy ETF?

By Trevor Onions , last updated January 10, 2012

Green technologies are gradually taking flight and bringing new investment opportunities with them. Now, several enterprising mutual funds have combined the innovation of alternative energy stocks with the ease and liquidity of Exchange Traded Funds (ETFs). If you’re looking to broaden and diversify your portfolio with experimental boldness, then you may want to consider investing in an alternative energy ETF. Here’s a breakdown of what you need to know to get started with these rising commodity funds.

About Alternative Energy ETFs
Alternative energy ETFs were launched to provide investors with a dose of social responsibility and profit potential. Current ETFs are based around power company stocks and commodity shares involved with energy sources like wind, solar, and nuclear power. Other ETFs incorporate a broad basket of energy shares from across the alternative sector, giving you instant diversification from throughout the green spectrum.
Most ETFs have returned modest gains in recent years, thanks to improvements in alternative energy technologies, increased public support, and government subsidies. ETFs based on solar and wind power are always under active management, adding and pruning stocks based on their performance, as new players enter this evolving market. These also constitute the most experimental and risky ETFs you can own, as solar and wind power ETFs occupy a significantly smaller and groundbreaking part of the total energy sector.
For more stability, look to ETFs centered on nuclear energy. Despite disasters like Fukushima and Chernobyl, nuclear power continues to be viewed as a safe and moderately clean alternative to fossil fuels. ETFs that plunged during the worst days of the Japanese nuclear crisis quickly recovered, thanks in no small part to the continued appeal of nuclear power. With thousands of new plants slated for construction across the United States and abroad, nuclear power is set to expand at phenomenal rates, and that means almost guaranteed profits.
Meanwhile, ETFs like PowerShares Cleantech Portfolio and iShares S & P Clean Energy Index Fund are great ways to get started with a well diversified foothold. These funds place your money in a wide variety of funds from solar, wind, biomass, and other power sources. Although high diversification means profit margins will be narrower, risk is lessened as well.
How to Buy ETFs
Buying and maintaining ETFs is easier than ever, and their maintenance fees are often a good deal lower than operating through a broker, or investing in traditional Index Funds. Look to the top mutual fund providers for easy access to alternative energy ETFs. Right now, Vanguard, Fidelity, and T. Rowe Price give easy access to buying, selling, and trading ETFs from the whole energy industry.
While fees typically start low, it’s best to minimize them as much as possible, if you’re examining several choices. Look to alternative energy ETFs that passively invest your money, with minimal active management. Actively managed ETFs rarely outperform the market, and they command higher fees that can eat into your growth.
In time, the alternative energy sector is all but certain to explode. Buying ETFs based on these technologies funds cleaner energy, and gives you a financial stake in a cutting edge class of investments.
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