Alan's Finance Blog

Can Green Energy ETFs Put Green In Your Wallet?

Remember a few years ago when “alternative energy” was all the rage? With crude oil trading at $150 and gasoline prices above $4 a gallon in many places, breaking free from our dependence on fossil fuels seemed like a good business opportunity.

As someone who greatly enjoys driving, air conditioning and electricity, I totally agree that it would be nice to diversify our energy sources. The question is: How to do it cost-effectively?

I believe the answer is to let free enterprise do its thing. Remove the artificial barriers, and the laws of supply and demand will lead us toward a good solution. Entrepreneurs will sort out the details.

Unfortunately, not every alternative-energy pioneer can succeed. There will be winners and losers. And investing in single stocks from this sector is a high-risk game. The good news is that you can get involved while staying diversified through exchange traded funds, or ETFs. Today I’ll tell you about some of them.

First let’s take a quick look at the different sources of energy …

Conventional Energy Sources

Fossil fuels are messy and expensive.

Fossil fuels: Good old-fashioned oil, coal, and natural gas provide the bulk of the industrialized world’s energy. We have the infrastructure already in place to find, produce and distribute this kind of fuel.

There are two problems, though. First, the easily-tapped reserves are running low. Second, the whole process is messy and unhealthy for people as well as the planet.

Nuclear energy: The secrets of the atom can also produce energy, and in many places atomic power plants go a long way toward meeting the demand for electricity. However, nuclear is not so great in transportation. You can’t run your car on uranium — at least not yet.

Hydro power: As long as water keeps running downhill, hydroelectric dams will be a good source of electricity, with relatively low environmental and safety risks. Like nuclear, though, hydro power is of limited usefulness when portability is required. What’s more, the best running-water sources have already been dammed.

That’s where we stand right now. Everything else is an “alternative.” So let’s take a look at …

The New Energy Sectors

Electric cars: The big problem is that batteries with enough juice to power a car are heavy. So heavy, in fact, that carrying them around often costs more energy than it saves!

The holy grail of the electric car industry, then, is the lightweight battery — one of the highest-potential but most elusive goals of the sector. Such things are being developed but are still very expensive. Most use a metal called lithium.

The Global X Lithium ETF (LIT) is probably the best and easiest way to tap into advanced battery technologies. Although this ETF has “lithium” in its name, the majority of its investments are in battery companies. Think of it as a “lithium food chain” ETF.

The sun won’t run out of energy anytime soon.

Solar energy: The sun is always there and doesn’t run out — or at least it won’t for a few billion years. Meanwhile we might as well tap into it.

Using sunlight to heat water is fairly simple; turning it into electricity is more complicated. New technologies are making the process a lot simpler, though. As this challenge is met, solar power could grow to provide much more than the fraction of our energy needs that it meets right now.

Currently two ETFs focus on solar energy: Claymore/MAC Global Solar Energy (TAN) and Market Vectors Solar Energy ETF (KWT). Both were launched in April 2008 and both are down about 70 percent from then. Solar energy may sound like a great idea, but it’s not yet a profitable idea for investors.

Wind energy: Remember when every farm had a windmill? They were handy for running the water pumps before electric lines made it out to the boonies. Now they’re just antiques.

What a change — now wind is the reason some farms exist. Oklahoma billionaire Boone Pickens has poured a ton of money into vast “wind farms” in the desert Southwest where huge windmills generate electricity.

Windmills: An old idea seeing new growth.

Wind energy has its limitations, of course. But it could still turn into a big business. Boone Pickens is no dummy about these things …

According to his Web site, his Mesa Power Group continues to pursue smaller projects throughout the United States and Canada through the American Wind Alliance, a cooperative formed with General Electric.

First Trust Global Wind Energy (FAN) and PowerShares Global Wind Energy (PWND) both target this alternative energy source, and like their solar cousins have not had much financial success. Wind energy is actually one of the worst performing industries of 2010. FAN and PWND are both down more than 30 percent so far this year.

Keep in mind that even if these ETFs are “green” for the environment, they may not necessarily put “green” in your wallet. Just like an old-fashioned gold rush, the alternative-energy rush is prone to hype and overconfidence.

This year most of the ETFs covering this sector have been hit hard, and it’s easy to start thinking that they look cheap. Are they a bargain at current prices, or are they only beginning to crash? I wish I knew the answer to that one. The “value investors” haven’t started buying them up just yet.

A somewhat less aggressive way to get into the alternative-energy group is with broader ETFs that don’t specialize in one niche like wind or solar. Alternative energy means different things to different people and as a result there is not just one index. Green, alternative, renewable, and progressive are among the monikers used to describe these funds.

Here are a few ETFs you may want to consider. But before you buy I suggest you dig a little deeper to see if they target the industries you want to own:

• PowerShares Wilderhill Clean Energy (PBW)
• PowerShares Global Clean Energy (PBD)
• Market Vectors Global Alternative Energy (GEX)
• PowerShares Wilderhill Progressive Energy (PUW)
• iShares Global Clean Energy (ICLN)
• First Trust Nasdaq Clean Edge U.S. Liquid (QCLN)

Nearly all the ETFs I’ve mentioned today are thinly-traded, so be sure to use limit orders when you buy or sell. Be cautious and know what you’re getting into.

Best wishes,

Ron

Why you will absolutely fail in trading if you don’t master this

There are many misconceptions about money management. Most think it means trading with stops, but that is only a small part of it. Below is a short part of the complimentary report I’ve found called “How to Safely Double Your Profits in 2009 Trading ETFs.” This little tip alone could save your trading account.

Why use risk controls?

Every trader/investor must guard himself against drawdowns, which refers to the percentage drop in his account size after one losing trade or consecutive losing trades. For example, imagine that after losing a few trades in a row, your $20,000 account is reduced to $12,000; that would be a drawdown of 8,000/20,000 = 40%. If I were to ask some new traders, “In order to be back up to $20,000, what percentage return do you need to generate?” Many would answer, “Since I lost 40%, I have to make back 40%!” This couldn’t be more wrong! Note that after losing 40%, the trader now starts with a lower base, i.e. to undo the $8,000 loss, the return he needs to generate is 8,000/12,000 = 66.6%! That is why I share free training videos on my website to help dispel some of the myths of trading.

The more severe the drawdown, the harder it becomes to undo the damage, as shown in the numbers below.

Drawdown % %Required to get back to break even
10%                  11.1%
20%                  25%
30%                  42.8%
40%                  66.6%
50%                  100%
60%                  150%
70%                  233.3%
80%                  400%
90%                  900%

That is why all professional money managers only risk 1-2% per trade. It’s because no matter how good your trading system is at some point it is a statistical fact you will have 10 losers in a row. Based on risking only 1-2% per trade this is only a 10-20% drawdown and easily recovered. 99% of the hype trading and investing courses in existence don’t say or do this. They say risk 5-10% per trade. It is wrong and will cause you serious financial pain if you follow their advice.

Many of them also use arbitrary stop loss advice. For example, they say, “Place your stop at $100.10 because that is on the other side of a major support or resistance, trend line, MA, etc.”

This makes your risk based on the size of the stop. That is also wrong because the risk can be too large and it’s not the same risk on each trade.

Others reverse this and say risk only 2% total period and let that determine your stop. This is also wrong and will hurt you because it is important to have the correct technical stop.

The answer is to do both. Use a percentage and technical stop together. It works like this. Let’s say the technical stop is $100.10, but based on your entry price that is a 3% risk. Since your plan calls for a 2% risk you simply lower the number of shares you are trading. This lets you stay within your 2% risk and have the correct technical stop. This is exactly what most professional money mangers do.

Some say that this will lower their profits because of trading fewer shares. So what! Study the numbers above again. You know the old quote, “More risk equals more reward.” Well it’s not always true. Sometimes more risk equals more risk! If you lose your money you have no chance to make a profit. Even losing 50% is disastrous because you would then need to make 100% to get back to even.

Like Warren Buffet says, there are only two rules in investing. Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.

I’d like to add a third rule. Correct money management and position sizing must be mastered to ensure your long term success.

The good news is that it is easy to have correct money management and position sizing. I just explained how to use a combo of a % stop and a technical stop. If you want more of an explanation please visit the free video area on this website and click on the “Why have risk controls” video.

The system of entries, stops and profits taking is only half of your key to success. The other half is money management. If you get this part wrong you will lose your account every time regardless of how good your system is.

Click here for a newsletter on how to safely average 6% per month trading Exchange-Traded Funds.

http://www.etftrendtrading.com/cmd.php?af=1115334

Thanks, and good luck!

PS- In order to access these powerful FREE videos you must first opt in for the complimentary report.

ETFs Bring the Middle East to You

The Middle East is big news this week with a state-owned company in the tiny emirate of Dubai asking for an extension on debt payments. Markets around the globe are watching intently.

I’m not especially surprised about this …

If you’ve been to Dubai or seen pictures of the shiny new skyscrapers, you know the place has grown like wildfire. With much smaller oil reserves than its neighbors, Dubai has made its mark as a trading center and playground for the wealthy.

Dubai is growing like crazy.

Thanks to exchange traded funds (ETFs), more Americans are investing in Middle Eastern markets. Timing is critical, of course, but you now have several quick and easy ways to trade the region’s growth. Today I’ll tell you about some of them.

6 ETFs to Trade the Middle East

The Middle East is a big, varied region. Some analysts lump North Africa into the mix — so sometimes you’ll see the acronym MENA, which stands for Middle East and North Africa. Others focus specifically on the oil-rich states between the Red Sea and the Indian Ocean.

Here is the full list of ETFs that cover the region, or portions of it.

• iShares MSCI Israel Capped Investable Market (EIS)

• iShares MSCI Turkey Investable Market (TUR)

• SPDR S&P Emerging Middle East & Africa (GAF)

• WisdomTree Middle East Dividend Fund (GULF)

• Market Vectors Gulf States Index ETF (MES)

• PowerShares MENA Frontier Countries Portfolio (PMNA)

You’ll notice that the first two funds, EIS and TUR, target single countries. Israel and Turkey are not the biggest countries in the region by any means, but they do have the most developed capital markets. Additional single-country ETFs in the region are expected to be launched next year.

The other ETFs on the above list are based on indexes that cover multiple world markets, sometimes ranging outside the Middle East. The exact mixture of countries varies considerably.

Some ETFs that sound “regional” are really quite concentrated …

The Middle East is a huge, diverse region.

For example, Market Vectors Gulf States Index ETF (MES) has almost half of its portfolio invested in Kuwaiti stocks.

SPDR S&P Emerging Middle East & Africa (GAF) has more than 60 percent in South Africa, with most of its Middle East exposure in Israel.

And PowerShares MENA Frontier Countries Portfolio (PMNA) has about 30 percent in Qatar.

Dubai, in case you’re wondering, is part of the United Arab Emirates (U.A.E.). WisdomTree Middle East Dividend Fund (GULF) has about 17 percent in the U.A.E. while PMNA has around 23 percent.

2 Additional ETFs to Consider …

JETS Dow Jones Islamic Markets (JVS) is a special case. The portfolio isn’t geographically based. Instead, JVS includes international companies that conduct their business in accord with Islamic practices — avoiding alcohol, for instance. Many of the stocks held by JVS are from the U.K., France, Canada, Switzerland, Japan and other markets.

Barclays Asian & Gulf Currency Revaluation ETN (PGD) provides exposure to some of the regional currencies such as the Saudi Arabian riyal and United Arab Emirate dirham. However, it is not a pure play as three Asian currencies are also included.

Should You Buy the Middle East Now?

Undoubtedly, there are risks in the Middle East: Much of the region depends on high oil prices to generate steady income, and no one knows what oil prices will do. Ethnic and political tensions create geopolitical risks. And the area sits astride key trade routes, making it important to far-away powers as they compete for business.

What’s more, most Middle Eastern countries are still classified as “emerging” and “frontier” markets. That means they can represent a tremendous growth opportunity — or a chance for huge losses.

Another point to keep in mind is that all the ETFs, and exchange traded notes (ETNs), I’ve mentioned are fairly new and haven’t attracted huge assets. Volume is usually low, and the bid/ask spreads can be significant. So for now you need to be extremely careful when trading any of these funds. However, if the Middle East prospers, I expect they will do very well over time.

The bottom line is that thanks to the new world of ETFs, investing in the Middle East is now almost as easy as investing in the U.S. And if the Middle East gets through the current turbulence intact, now may be a great time to consider buying one of these ETFs.

Best wishes,

Ron

P.S. I’m now on Twitter. You can follow me at http://www.twitter.com/ron_rowland for frequent updates, personal insights and observations about the world of ETFs.

If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://www.twitter.com/ron_rowland to receive updates on either your cell phone or Twitter page.

The Next Sector to Outperform the Market

By: Anthony Haddad

The market rebound, which began in March, has so far increased the value of the S&P 500 by about +55%. Economic indicators are still weak, but the market tends to lead the recovery by several months.

Despite the worry, cyclical stocks — those affected by the economic cycle — are up sharply. Financials are up +146%, industrials are up +74%, consumer discretionary is up +70%, and technology is up +55%. On the other side of the spectrum, defensive stocks — those generally thought to be immune from the underlying economy’s swings — have underperformed. Utilities, for example, are up just +30%. Staples are up +31%. Health care is up +31%.

This is what the beginning of bull markets look like.

In the early stages, high-tech and industrial shares outperform. As the bull gains legs, basic-industry stocks enter the picture. At the peak, energy and metal companies outperform.

In bearish periods, consumer staples and service stocks outperform. On the way down, it’s utilities. Near the bottom, financial and consumer cyclical stocks lead the pack.

During the past three months, the story has been largely the same as it has since March. Financials have beat the S&P by 10.6 points, industrials by 6.5 points, and consumer discretionary by 4.7 points. All other sectors have lagged, although technology hasn’t lagged by much (-0.7 points).

If history means anything and the bull is real, going forward cyclical stocks will continue to outperform the market and defensive stocks will lag. That means you’ll continue to want to hold shares of companies in industrial, consumer discretionary and technology companies.

But in particular I think there’s a real opportunity in technology because of how it has lagged other cyclical sectors since March. Up +54% since March, tech has performed just slightly worse than the S&P (+55%). That’s unusual for this stage of the market cycle, and that could change quickly.

For broad coverage in this sector, an ETF like the Technology SPDR (NYSE: XLK) does the trick.

Anthony Haddad
Staff Writer
StreetAuthority.com