Forbes ETFZone had an article today by Wil McClachy about socially conscious ETFs, with some comparison between iShare’s two social index ETFs, KLD and DSI, contrasted with PowerShares Cleantech and Clean Energy ETFs, PZD, and PBW. This ties in well with my entry Green ETFs- How to Choose from last month by expanding the field to consider general social investing as well as just clean/alternative energy.
I also discuss the new Clean Energy Index fund, CELS, in that blog entry; it is scheduled to launch next month.
Holding a broad portfolio is well worth doing, because the basic principle of diversification implies that most investors would be crazy to focus the entire stock portion of their portfolio into such a volatile sector as energy, let alone clean energy. Even though I’m a strong believer in peak oil, and I feel that the peak may even have already passed, and economic recession in any large part of the world could lead to a fall in oil prices, which would hurt the biofuels sector. In addition, there is a lot more to energy than just oil prices, and while peak gas and peak uranium may be near at hand, I don’t think anyone is arguing that we’re going to see peak coal soon.
I agree with McClachy’s point that the extra expense of the Social index ETFs may not justify the additional expense (0.5% vs 0.1% for SPY)… the extra .4% might be better used (and better targeted) by a donation to your favorite charitable cause, but for many investors, it is deeply troubling to own firms that treat the environment, society, or their workers badly, and a donation to charity does not serve as sufficient absolution. When working with clients, I try to find out the approach that suits them best; it is often a little of both. Even though choosing SPY and a donation to charity might be the best financial move, it’s more important to do what makes you able to sleep at night, especially when we are talking about fractions of one percent.
On the other hand, fractions of a percent should not be minimized. If you had $100,000 to invest in either SPY or KLD, and choose to put the money in SPY, while keeping half of the savings in your account, and to donate the other half to a charity every year, and SPY were to increase 8% every year for 30 years, you would have donated over $25 thousand to charity in the interim, while and end up with over $57 thousand extra in your account after that time.
This is the real advantage of investments in alternative energy: the chance to have your cake and eat it, too. Both rising energy prices due to peak oil/gas/uranium and the actions our governments take to combat global warming should increase the returns for alternative energy. To some extent, this is already recognized by the investment community, and already priced in. However, I feel that the effects of both have been grossly underestimated by most market participants, despite the recent surge of interest. Over the long term, the seriousness of the situation we are in will become clear, and that will allow ethical investors in alternative to also be successful investors. When it comes to social investing, I feel there is often a trade-off between loss of diversification and increased cost. With investment in alternative energy, the trade-off is between increased risk and increased returns. The increased risks of alternative energy arise from the small size and speculative nature of many (although not all) of the companies involved, and the concentration of ones’ assets in a sector. But managing risk is what portfolio theory and asset selection are about; as is making wise trade-offs between risk and return. To me, the case for alternative energy is compelling, the only real question is how much exposure (and volatility) the particular investor is prepared for, emotionally and financially.
Another Social/Clean Energy ETF article: ETF Guide.