PowerShares WilderHill Clean Energy(ETF) (PBW)

WiseWallstWhiz (< 20) Submitted: 12/20/06 5:21 PM : Start Price: $17.50 PBW Score: 15.37

Clearly the people who have looked at PBW have not gone deep into its indexed holdings.

This socially responsible exchange-traded fund mimics the movements of the WilderHill Clean Energy Index, which tracks businesses using technologies that promote cleaner energy and conservation. Because many companies utilizing alternative energy technologies are very small, the fund's holdings congregate among more volatile small-cap stocks (nearly 40% of the portfolio is in micro-caps), while many of its natural-resource peers lean toward larger-cap stocks.

This gives the ETF a dicier profile. Holdings such as Energy Conversion Devices ENER and MEMC Electronic Materials WFR produce inconsistent earnings and carry arguably rich valuations after strong runs in recent years. The speculative nature of these companies can lead to big gains but also big losses for the ETF.

The fund also is less diversified than it seems. More than half of its assets are in the industrial materials sector and the fortunes of the businesses it owns in other sectors, such as hardware stock Maxwell Technologies MXWL, are closely tied to energy prices. Maxwell Technologies develops and manufactures energy storage and power delivery components. Rising oil and gas prices feed the demand for Maxwell products, including ultracapacitors, which are used in hybrid vehicles. However, if oil and gas prices fall, products such as these could suffer.

In short, the ETF's quirks promise volatility. Its small-cap, alternative energy focus led to substantial gains in 2005, as holdings such as Pacific Ethanol PEIX and Evergreen Solar Energy Conversion Devices ESLR soared. However, when the small-cap rally ends and energy prices fall, the fund's returns will likely drop as well.

To top it off, the fund is hardly cheap. It has a 0.70% expense ratio.

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