The intense and growing investor interest in Clean Energy Investing
can be seen in the recent growth of new clean energy mutual fund and Exchange
traded fund issues. Although competition for investors' money is heating
up, and I've noticed a slow decline in fund fees, those fees are still quite
high, with expense ratios ranging from 1% to 2.75% for Clean
Energy mutual funds and 0.5% to 0.85% for Clean
Energy ETFs.
For many investors, that leaves a lot of room for cost savings by investing
in individual stocks. Nearly all the benefits of diversification can be achieved
with a 20-50 stock portfolio, if those stocks are chosen to minimize internal
correlations. An investor who decides to place 20% of his portfolio in
Clean Energy should only need 4-10 stocks in the sector to achieve most of the
benefits of diversification.
For example, an investor with $20,000 in a diversified IRA might decide that
this year's $5000 contribution should go into Clean Energy. He could buy
$1000 worth of five Clean Energy stocks to achieve a 20% allocation to clean
energy without significantly reducing his overall diversification, and resolve
to purchase another $1000 worth of a single clean energy stock each subsequent
year, to maintain that approximate diversification. The table and graph
below show how his costs
would compare to investing the same amount in sector mutual funds or ETFs,
assuming a moderate $13 brokerage commission. These calculations assume no
price appreciation. If price appreciation were included, ETF and mutual
fund costs would be higher than those given, because these costs are based on a
percentage of assets under management.
| |
|
Cumulative commissions & expenses
|
| Year |
Total invested |
Stocks |
lowest
cost
ETF |
lowest
cost mutual fund |
| 1 |
$5,000 |
$
65 |
$
37 |
$
65.50 |
| 2 |
$6,000 |
$
78 |
$
79 |
$
144.10 |
| 5 |
$9,000 |
$
117 |
$
233 |
$
458.50 |
| 10 |
$14,000 |
$
182 |
$
586 |
$
1,244.50 |
The stock investor following this strategy will save money in the first year compared to even the
least expensive mutual fund available (the Winslow
Green Growth Fund), and by the second year compared to the least expensive
clean energy ETF (the iShares
S&P Global Clean Energy Index.)
A Quick Way to Choose Clean Energy Stocks
All this assumes the investor has the time to spend to pick appropriate
stocks. For a small investor like the one in the example, the time
required will need to be minimal. With literally hundreds
of clean energy stocks to choose from, the task seems monumental. It
doesn't have to be.
One simple way is to look at the top holdings of a few clean energy mutual
funds, and pick your stocks from among those. By making sure to spread
your holdings over different alternative energy sectors (Wind,
Solar, Efficiency,
etc.), you'll be able to maximize your diversification. Our CleanTech
Stocks page shows stock categories in the right-hand column.
The goal of this strategy would be to approximately replicate the performance
of the funds, but to do so at much lower cost. If this were done
outside of a tax advantaged account such as an IRA, after-tax performance could
be enhanced further by selling losing stocks in order to shield capital gains or
even a little ordinary income from taxation, and replacing them with similar
companies.
Tomorrow I'll take a look at Clean
Energy mutual fund holdings to see what this portfolio might look like. (The
link will be broken until then.)
Tom Konrad, Ph.D.
DISCLOSURE: None.
DISCLAIMER: The information and trades provided here are for informational
purposes only and are not a solicitation to buy or sell any of these securities.
Investing involves substantial risk and you should evaluate your own risk levels
before you make any investment. Past results are not an indication of future
performance. Please take the time to read the full disclaimer here.
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