ETF Update: Solar, Shipping, Utilities
Solar Industry, ETF Prospects Shine As More Adopt Alternative Technology
Solar company LDK (LDK) predicts it will put up numbers this year that could shine a light on ETFs.
The company offered an upbeat 2009 revenue outlook, because its expansion of wafer production is ahead of schedule, according to the Associated Press. Analysts expect its full-year revenue to hit $2.43 billion next year.
The solar industry is growing, and it’s probably equal parts out of necessity (rising energy costs) and desire (concern about the environment). Whatever the reason, more companies and institutions are looking into how they can use solar power.
General Motors (GM) said it will install solar panels on the roof of its transmission assembly plant in Maryland, which will allow the company to displace 20% of the power it buys from a local utility, reports the Associated Press. Once installed, it will generate enough power to run about 140-150 homes for a year.
Big box stores are taking advantage of their size to get tax breaks by installing solar panels on their roofs in order to generate electricity.
Even schools are starting to get in on the action: Tallahassee, FL, and Leon County Schools are working together on a solar-school pilot project at Oak Ridge Elementary, reports Tamaryn Waters for the Tallahassee Democrat. If the project is a success, other schools in the district will go solar, too.
- Claymore/MAC Global Solar Energy (TAN): up 1% since April 15 inception; LDK is 5.1%
- Market Vectors Solar Energy (KWT): down 2.4% since April 23 inception; LDK is 4%
Global Shipping ETF: Investment in the Global Economic Infrastructure
For investors who have been looking for exposure to the global shipping industry via an ETF, the search is over: Claymore launched the Claymore/Delta Global Shipping Index (SEA) Monday morning.
Claymore President Christian Magoon tells us that they see the industry as investment in the infrastructure of the global economy. “As the world continues to be more interlinked in imports and exports, the shipping sector is a proxy for global economic sentiment.”
The basic premise of the shipping industry, Magoon says, is that they rent out capacity to haul things from raw materials and liquids to finished goods, like cars. Right now, the industry is sitting pretty, because it can lease the space for more than the cost of carry, thanks to a shortage in the number of ships available.
The global shipping industry isn’t without risk, though. Two of the biggest factors affecting it are:
- The health of the global economy. When budgets are stretched, there’s going to be less demand, which will translate into the demand for shipping things. The opposite could be true as well, Magoon says. Strong economic growth could benefit the shipping industry.
- An overcapacity risk. If too many ships or ports are built, it’s going to affect the industry. The index’s provider, Delta Global, found that only 11% of ships due to be delivered in the coming years are currently under construction. There are also a dozen new ports around the world set to go under construction, but none of them have yet broken ground, largely as a result of the credit crisis. If overcapacity is a risk, it’s one that could be further off than thought.
“There’s this classic supply and demand issue that affects shippers,” Magoon says. Just as they have the potential to do well when things are moving onward and upward, they’ve also got the potential to feel the pinch when economic sentiment is negative.
The 30-component fund is most heavily weighted in Greece, which is 35.3% of the index. The United States is the second-largest component at 19%, followed by Bermuda and the Bahamas at 15% apiece. Not only are the these countries favorable in the access they give to key markets, but they have favorable tax policies to corporations. The expense ratio is 0.65%.
One strong benefit of shipping stocks is their ability to pay dividends, thanks to their structure. While the ETF hasn’t yet declared a dividend, which it will do on a quarterly basis, the dividend on the index is a little over 8%.
“I think what we have here is like the Gold Rush,” Magoon says. “People went out and mined - some did well, many did not. The people who did do well were those who sold blue jeans, picks and axes.”
Utility Sector ETFs Are Plentiful, But They’re In Need of a Jolt
Utility sector ETFs are often looked to for an element of predictability, but JP Morgan has misjudged this sector with regard to US electric utilities.
In a recent article, Jonathan Bernstein of ETFZone put together a list of the most efficient, best-diversified and lowest-risk utilities ETFs on the market. He explained that investors typically look to this sector to deliver regular cash dividends and lower portfolio beta.
Similar to most sector funds, the number of utilities sector ETFs has exploded in recent years. This sector now offers investors opportunities that include globally diversified ETFs, strategic allocation ETFs, and ETFs providing short exposure or leverage characteristics.
Some of the top utilities ETFs include:
- iShares Dow Jones US Utilities Sector Index Fund (IDU), down 9.7% year-to-date
- Vanguard Utilities ETF (VPU), down 9.5% year-to-date
- First Trust Utilities AlphaDEX Fund (FXU), down 11.1% year-to-date
- Rydex S&P Equal Weight Utilities ETF (RYU), down 10% year-to-date
- SPDR S&P International Utilities Sector ETF (IPU), fund inception on July 16
However, according to a recent Reuters article, JP Morgan has switched to a “neutral” stance on the U.S. electric sector. The article cites concerns such as falling natural gas prices over the past few weeks contributing to the shift.
Another concern leading to the change was the recent campaign of oil billionaire T. Boone Pickens’ calling for $1 trillion worth of investing in wind power to displace natural gas consumption for power in favor of natural gas consumption as transportation fuel.
JP Morgan analyst, Andrew Smith, explained that they expected uncertainty in the US economy coupled with strong fundamentals and earnings momentum of the sector to support certain stocks throughout the year. However, he admits that they were wrong to recommend a positive stance.
Regardless, the utilities sector has lacked its predictability and utilities ETFs have shown this in their negative returns.
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This article has 2 comments:
- kkin365
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Aug 26 10:30 AM- vpratt
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Aug 26 12:54 PM