Whether you choose to invest in renewable clean energy as a matter of conscience or because you believe it's a growing industry, a green energy mutual fund can be a good way to make the investment. Renewable clean energy mutual funds allow you to buy a preconfigured diverse portfolio in the industry. Given that renewable energy firms range from the smallest startups all of the way up to some of the nation's largest utilities, taking advantage of mutual fund diversification, whether through an index fund or an actively-managed mutual fund can help to smooth out some of the risk inherent in the sector.
Types of Renewable Energy
The International Energy Agency estimates that one-quarter of the world's energy will be renewable by 2018. Renewable energy spans many of the "alternative" power generation methods. Solar and wind power are renewable, as are hydroelectric, tidal and geothermal power. These generation sources all come from converting sources of energy that are fundamentally unlimited and renewable.
Beyond Power Generation
There is more to investing in renewable clean energy than just buying solar and wind farms, though. Many mutual funds in the sector also hold related companies. As such, funds sometimes buy shares of electric car makers, whose products run on renewable energy. Others buy electronics companies that make green energy components or are manufacturers of large wind turbines.
Index vs. Managed
Renewable clean energy mutual funds come in two broad classes. Managed funds have an expert or team of experts that carefully select the stocks that they hold, actively trading them in and out with the goal of squeezing out the highest possible return while staying invested in clean energy companies. Index funds, on the other hand, are designed to replicate sector indexes created by third parties like Russell, Barclays, or Standard and Poor's Dow Jones. Index funds, which aren't as actively managed as regular funds, frequently have lower expense ratios. Many are also structured as exchange-traded funds. While mutual funds can only be traded once per day, ETFs are sold as shares on public markets, letting you trade them throughout the day.
If you're looking to get exposure to clean renewable energy, but would also like a more stable investment, mutual funds in the utility sector may be a suitable choice. When you invest in a standard utility fund, you will get holdings in companies that use coal, gas and oil-fired plants as well as nuclear. However, since many traditional utilities are either generating or using renewable energy, you're still gaining exposure to the sector. Investors that are looking to buy renewable, clean energy funds as a matter of conscience, though, may choose to steer away from traditional utilities.
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- First Trust Portfolios LP: First Trust NASDAQ® Clean Edge® Green Energy Index Fund (QCLN) - Holdings of the Fund as of 8/23/2013
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- Vanguard: Vanguard Utilities Fund - Stock Holdings as of 6/30/2013
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