ETF Update: Finding Energy Alternatives

The United States has followed a disturbing pattern in forming energy policy.  Most of the time we focus on fossil fuels.  Alternative energy only gets attention when oil prices are high.  With last year's oil price spike still fresh, there is a just a chance that things will be different this time.

The incoming Obama Administration has a commitment to alternative energy sources, and that is attracting investor attention.  We use the ratings from our TCA-ETF model to spot developments in sector investing.  This week's ratings show interesting moves for both alternative energy and nuclear.  Today we shall focus on the Alt Energy.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Investing in Energy Alternatives

The Global Alternative Energy ETF (GEX) is our choice for investing in this sector.  The fund is based upon the Ardour Global Index.  Van Eck Global describes the index as follows:

AGIXLT is a rules-based, global capitalization-weighted, float adjusted index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the alternative energy industry.

The index includes a 2/3 weighting on foreign companies and relatively good diversification.  While the top five companies constitute 33% of the fund the overall concentration falls off rapidly.  It is 35% US holdings, with a beta of 2.1 and a P/E of about 20.  The index declined about 65% in 2008.

Fundamental Analysis

Election Stocks, our sister site, is covering the Obama transition, including this piece on incoming science advisors and their commitment to alternative energy.

Simit Patel at The Trading Goddess makes GEX a favorite choice for 2009 and the coming years, emphasizing both Obama and the decline in fossil fuels.

Kevin Grewal at ETF Trends cites both fundamental (Obama) and technical (50-day MA) reasons for making GEX a sector to watch in 2009.

Tom Konrad has an interesting slant, comparing actively and passively managed funds in the clean energy space.  He finds little difference in performance.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Wednesday night, December 31st. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. There was little change at the top.  We were up about 5.5% on the week, a bit less than the S&P 500.

Based upon the current ratings, we continued our bullish stance in the Ticker Sense Blogger Sentiment poll. We do note that the number of sectors rated "buy" is rather narrow, at 17 out of 57.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.