Saturday, July 26, 2008
Wednesday, July 23, 2008
Investing in Solar: Interview with Richard Asplund who developed the MAC Global Solar Energy Index
The solar industry is a big business. Some of the solar manufacturers have bigger market capitalizations than many well-known energy companies. To gain a better perspective on this sector, we interviewed Richard W. Asplund, the investment analyst who developed the index underlying the world’s first solar exchange traded fund (ETF), the MAC Global Solar Energy Index (SUNIDX). The fund will likely bring a measure of liquidity and transparency to this market. Mr. Asplund is also an engineer, lawyer, and author of Profiting from Clean Energy: A Complete Guide to Trading Green in the Solar, Wind, Ethanol, Fuel Cell, Carbon Credit Industries, and More. The index underlies the Claymore/MAC Global Solar Energy ETF (TAN).
Q. Is the U.S. at a disadvantage in terms of long term competitiveness by its failure to pay attention to climate change?
A. I don’t think it’s a threat to the economy, per se. I think we’re waking up to the investment opportunities. The United States, for example, has started a lot of research in thin-film solar, and a lot of venture capital is flowing into basic level solar research.
In this industry, the technology is more important than labor costs. If you are building a solar factory, the most important aspect of staffing it is skilled labor. Renewable Energy Corp. (Oslo: REC.OL) of Norway just decided to build their big new plant in Singapore where skilled labor is available, but not necessarily the cheapest labor. The company did not say why it did not choose China, although intellectual property protections, transport, and pollution are likely issues. It is a technology driven sector. It’s not a straight commodity business; it’s a high technology business.
Q. How can people profit from combating climate change?
A. I think there’s a huge opportunity by picking the right sectors in the clean energy space. The ETF structure is a good way to do it because risk is diversified. There are still major differences in technology. Nobody really knows for sure what technologies will win over say a five or 10-year time frame. The advantage of the ETF structure is the diversification of the portfolio across technology. Essentially, an investor owns everything. So whatever works, is going to take off inside the index.
As an example, First Solar, Inc. of Tempe, AZ, (FSLR) essentially came out of nowhere about two years ago with thin-film solar panels made of cadmium telluride. The company had been working on their technology for 10 years but nobody paid much attention to them because they hadn’t gotten beyond lab work. About two years ago they figured it out and put up their plant, and now they’re the biggest market cap player out there. The advantage of the ETF structure is that a company like First Solar will come into the index shortly after they do an initial public offering (assuming they meet the other index criteria) and then holders of the ETF will have exposure to
them.
It is a dynamic portfolio that keeps up with the industry, because of the additions and deletions of stocks that are in there. There’s no stock picking in the index. If they meet the criteria then they’re in. If they don’t meet the criteria, they’re out. It is a dynamic, diversified portfolio that helps you track the industry.
What is interesting about the solar index is that a lot of people have a tendency to think solar is still barely out of the laboratory. Is this really going to work? Is this just a science experiment? Am I going into tiny little micro cap companies that are losing money? But that’s definitely not the case. Five years ago, yes. But today, no. In the past two years, solar has really come into its own as an investment sector.
The MAC Global Solar Energy Index has a total market capitalization of $100 billion spread across 25 companies. Market caps of the constituent stocks are much larger than a lot of people would think -- they run from very low to $18 billion to $20 billion on the upside for pure-play solar companies. The average market capitalization of the constituents in the index is $3.8 billion and the median market cap is $1.2 billion, so it is a set of pretty good-sized stocks.
Q, What is the most important thing people need to know about investing in the solar
business?
A. One point I like to make about solar, is that some people say it is a bubble – a science experiment bubble. The solar sector has been growing at a 47% annual rate over the last six years. Most industry forecasts say it will grow at least 40% a year for the next five to 10 years. Right now,solar accounts for only 0.06% -- less than one-tenth of one percent – of the world’s electricity production.
By 2030, the International Energy Agency says that $4 trillion will have to be spent on new electric generation. A lot will be needed in developing countries – but many aging plants in the United States will need to be replaced as well. We have a choice about what kind of facilities to build – coal, natural gas, or nuclear, or do we want to go renewable – geothermal, wind, and solar. Geothermal is a great solution, and we should do as much as we can, but it can only go in certain active areas, so it is not a mass solution. Wind and solar are much more mass solutions, although they are not silver bullets, because they’re intermittent sources of power. However, they can be an important part of meeting our needs for renewable and clean energy.
Q. What do you say to people who claim that the solar industry is a bubble like the dotcom boom of the late 1990s?
A. The solar industry has been out of the laboratory for years and is in mass production on a big scale. The United States and other countries have been working on solar for 30 or 40 years. We’re borrowing technologies from the semiconductor industry and the thin film coating industry. There is a lot of mix and match and manufacturing know-how being brought to bear on the solar sector.
The solar sector in 2007 had $30 billion worth of sales. It is also a profitable industry. Twenty of the 25 stocks in the MAC Solar Index had a profit in 2007. Pretax profits for the entire sector were about $11 billion in 2007, Photon Consulting reported.
This is a bricks-and-mortar sector. During the dotcom bubble, no one knew how to really value those stocks, because there were no profits on which to base the valuations.
Q. Is regulatory policy important in solar investing?
A. There is short-term risk from changes in regulatory policy. The solar industry is still being driven in large part by subsidy-supported demand, especially by feed-in tariffs in Europe – Germany, Spain, Italy, and France. In the United States, we have increasing regulatory support. California has a $3 billion dollar solar support program. We have renewable portfolio standards in 21 states that require utilities to start using more renewable energy. So, the solar industry still is government supported and government subsidies help drive demand.
Over the next several years, costs are expected to steadily come down in the solar sector. They’ve come about down 5% per year historically; but they’ve been held up over the last couple of years because there was a polysilicon shortage. Over the next two to three years, prices should come down fairly sharply, and that will get us closer to grid parity. First Solar, for example, intends to have their pricing down to 10 cents per kilowatt-hour by 2010, which matches the retail grid with no subsidies. The company then intends to be at 8 cents per KWh by 2012. The other companies are not quite as far along in terms of reducing their pricing, but that gives you an idea how quickly the industry really is moving toward grid parity without subsidies. Short term, there is significant volatility and risk due to the extent of government support.
The German government is talking about increasing the speed at which its feed-in tariff declines. German electricity consumers are spending a lot of money supporting solar, and there is some political backlash, because it is not the German companies that are benefiting as much anymore.
Now it’s Chinese solar companies and U.S. solar companies that are benefiting as well. But, what’s been happening is that, even as support dips in one country, then all of a sudden you have another country that comes out of the blue and says, “OK we’re going to bring on a huge solar program,” so the net effect is that government support globally remains strong.
Spain is such a case. The demand for solar energy is huge in Spain. They have a feed-in tariff and are the fastest growing solar demand sector right now. But everybody watches that market closely. If any change is hinted at in Spain, it can cause solar stocks to move 5% in a day.
As I said earlier, if you just take a long-term picture of this sector and focus on the fact that the industry is moving towards grid parity, then you don’t need to worry about short-term fluctuations. Companies that are in the lead in the solar sector are going to make a lot of money.
Q. Is the U.S. at a disadvantage in terms of long term competitiveness by its failure to pay attention to climate change?
A. I don’t think it’s a threat to the economy, per se. I think we’re waking up to the investment opportunities. The United States, for example, has started a lot of research in thin-film solar, and a lot of venture capital is flowing into basic level solar research.
In this industry, the technology is more important than labor costs. If you are building a solar factory, the most important aspect of staffing it is skilled labor. Renewable Energy Corp. (Oslo: REC.OL) of Norway just decided to build their big new plant in Singapore where skilled labor is available, but not necessarily the cheapest labor. The company did not say why it did not choose China, although intellectual property protections, transport, and pollution are likely issues. It is a technology driven sector. It’s not a straight commodity business; it’s a high technology business.
Q. How can people profit from combating climate change?
A. I think there’s a huge opportunity by picking the right sectors in the clean energy space. The ETF structure is a good way to do it because risk is diversified. There are still major differences in technology. Nobody really knows for sure what technologies will win over say a five or 10-year time frame. The advantage of the ETF structure is the diversification of the portfolio across technology. Essentially, an investor owns everything. So whatever works, is going to take off inside the index.
As an example, First Solar, Inc. of Tempe, AZ, (FSLR) essentially came out of nowhere about two years ago with thin-film solar panels made of cadmium telluride. The company had been working on their technology for 10 years but nobody paid much attention to them because they hadn’t gotten beyond lab work. About two years ago they figured it out and put up their plant, and now they’re the biggest market cap player out there. The advantage of the ETF structure is that a company like First Solar will come into the index shortly after they do an initial public offering (assuming they meet the other index criteria) and then holders of the ETF will have exposure to
them.
It is a dynamic portfolio that keeps up with the industry, because of the additions and deletions of stocks that are in there. There’s no stock picking in the index. If they meet the criteria then they’re in. If they don’t meet the criteria, they’re out. It is a dynamic, diversified portfolio that helps you track the industry.
What is interesting about the solar index is that a lot of people have a tendency to think solar is still barely out of the laboratory. Is this really going to work? Is this just a science experiment? Am I going into tiny little micro cap companies that are losing money? But that’s definitely not the case. Five years ago, yes. But today, no. In the past two years, solar has really come into its own as an investment sector.
The MAC Global Solar Energy Index has a total market capitalization of $100 billion spread across 25 companies. Market caps of the constituent stocks are much larger than a lot of people would think -- they run from very low to $18 billion to $20 billion on the upside for pure-play solar companies. The average market capitalization of the constituents in the index is $3.8 billion and the median market cap is $1.2 billion, so it is a set of pretty good-sized stocks.
Q, What is the most important thing people need to know about investing in the solar
business?
A. One point I like to make about solar, is that some people say it is a bubble – a science experiment bubble. The solar sector has been growing at a 47% annual rate over the last six years. Most industry forecasts say it will grow at least 40% a year for the next five to 10 years. Right now,solar accounts for only 0.06% -- less than one-tenth of one percent – of the world’s electricity production.
By 2030, the International Energy Agency says that $4 trillion will have to be spent on new electric generation. A lot will be needed in developing countries – but many aging plants in the United States will need to be replaced as well. We have a choice about what kind of facilities to build – coal, natural gas, or nuclear, or do we want to go renewable – geothermal, wind, and solar. Geothermal is a great solution, and we should do as much as we can, but it can only go in certain active areas, so it is not a mass solution. Wind and solar are much more mass solutions, although they are not silver bullets, because they’re intermittent sources of power. However, they can be an important part of meeting our needs for renewable and clean energy.
Q. What do you say to people who claim that the solar industry is a bubble like the dotcom boom of the late 1990s?
A. The solar industry has been out of the laboratory for years and is in mass production on a big scale. The United States and other countries have been working on solar for 30 or 40 years. We’re borrowing technologies from the semiconductor industry and the thin film coating industry. There is a lot of mix and match and manufacturing know-how being brought to bear on the solar sector.
The solar sector in 2007 had $30 billion worth of sales. It is also a profitable industry. Twenty of the 25 stocks in the MAC Solar Index had a profit in 2007. Pretax profits for the entire sector were about $11 billion in 2007, Photon Consulting reported.
This is a bricks-and-mortar sector. During the dotcom bubble, no one knew how to really value those stocks, because there were no profits on which to base the valuations.
Q. Is regulatory policy important in solar investing?
A. There is short-term risk from changes in regulatory policy. The solar industry is still being driven in large part by subsidy-supported demand, especially by feed-in tariffs in Europe – Germany, Spain, Italy, and France. In the United States, we have increasing regulatory support. California has a $3 billion dollar solar support program. We have renewable portfolio standards in 21 states that require utilities to start using more renewable energy. So, the solar industry still is government supported and government subsidies help drive demand.
Over the next several years, costs are expected to steadily come down in the solar sector. They’ve come about down 5% per year historically; but they’ve been held up over the last couple of years because there was a polysilicon shortage. Over the next two to three years, prices should come down fairly sharply, and that will get us closer to grid parity. First Solar, for example, intends to have their pricing down to 10 cents per kilowatt-hour by 2010, which matches the retail grid with no subsidies. The company then intends to be at 8 cents per KWh by 2012. The other companies are not quite as far along in terms of reducing their pricing, but that gives you an idea how quickly the industry really is moving toward grid parity without subsidies. Short term, there is significant volatility and risk due to the extent of government support.
The German government is talking about increasing the speed at which its feed-in tariff declines. German electricity consumers are spending a lot of money supporting solar, and there is some political backlash, because it is not the German companies that are benefiting as much anymore.
Now it’s Chinese solar companies and U.S. solar companies that are benefiting as well. But, what’s been happening is that, even as support dips in one country, then all of a sudden you have another country that comes out of the blue and says, “OK we’re going to bring on a huge solar program,” so the net effect is that government support globally remains strong.
Spain is such a case. The demand for solar energy is huge in Spain. They have a feed-in tariff and are the fastest growing solar demand sector right now. But everybody watches that market closely. If any change is hinted at in Spain, it can cause solar stocks to move 5% in a day.
As I said earlier, if you just take a long-term picture of this sector and focus on the fact that the industry is moving towards grid parity, then you don’t need to worry about short-term fluctuations. Companies that are in the lead in the solar sector are going to make a lot of money.
The Authors Speaking at the Libertyville Noon Rotary Club
Earlier this year Neal Weintraub and Andrew Hyman spoke about their book,
ETF Strategies and Tactics at the Libertyville Noon Rotary Club at Lambs Farm in Libertyville, Illinois.
ETF Strategies and Tactics at the Libertyville Noon Rotary Club at Lambs Farm in Libertyville, Illinois.
Neal and Andrew on YourMoneyRadio.com
Neal Weintraub and Andrew Hyman, two of the co-authors of ETF Strategies and Tactics: Hedge Your Portfolio in a Changing Market will be interviewed by Chuck Jaffe, noted Marketwatch columnist and host of Welcome to Your Money
on Thursday, 24 July 2008. This program is broadcast on WBIX 1060 AM in Boston and heard worldwide over the internet.
on Thursday, 24 July 2008. This program is broadcast on WBIX 1060 AM in Boston and heard worldwide over the internet.
Tuesday, June 3, 2008
Lifecycle Funds from TD Ameritrade for Retirement and College Planning
One challenge in planning for retirement, or any goal with a particular date, is how to invest to meet that goal. How much should an investor have in different types of investments? How much in stocks, bonds, and other asset classes? How should the proportions change over time? For example, a person with one year to go on his retirement may wish to have more of his portfolio in fixed income than equities, as it provides more certainty about the future value of the investment.
Recently, many mutual funds have set up lifecycle or target date funds that are designed to assist people in meeting investment goals by a particular date. They tend to have more of the assets in equities when the target date is far away and reduce that amount, substituting fixed income, as the date approaches. Now, TD Ameritrade has put together a family of ETFs that allow investors to make lifecycle investments at a lower cost -- 65 basis points -- than the lifecycle mutual funds.
The TDAX Independence Exchange Traded Funds series from XShares Advisors provides investors with 5 target date funds -- 2040, 2030, 2020, 2010, and its Independence in Target Fund (designed for a near term target. The table depicts the funds asset allocations at inception and target date.
Assets will be adjusted as the target date approaches, from a more aggressive allocation that emphasizes equities to a more conservative allocation, that emphasizes fixed income. Each portfolio is designed to have 89%fixed income, 3% international equity, and 8% domestic equity on the target date. After reaching the target date, the allocation is adjusted over 5 years to 68% fixed income, 8% international equity, and 24% domestic equity. The table below shows the starting and ending breakdowns for each fund.
What the experts say
In a recent article, noted retirement experts Zvi Bodie and Jonathan Treussard of Boston University discussed how appropriate Target Date Funds were for people in planning their retirement.2 They note that many people in self-directed retirement plans, such as IRAs and 401ks may not know enough about investing to choose the right funds, or may not put in the time and effort to find them. Simple target date strategies may be an improvement over many of the choices made by people who do not know that much about planning. (And let’s not forget the fact that employers do little to educate their employees in this area). Bodie and Treussard observe that there are certain people for whom a target date fund is a good solution. Others, however, may be more risk averse or have a higher exposure to market risk through their means of earning an income, and may benefit more from a investments that have greater safety and are matched to their retirement date, such as Zero Coupon TIPS (Treasury bonds with prices that adjust upward for inflation) with a maturity date matching their retirement. Investors need to consider their risks when choosing retirement fund options.
Recently, many mutual funds have set up lifecycle or target date funds that are designed to assist people in meeting investment goals by a particular date. They tend to have more of the assets in equities when the target date is far away and reduce that amount, substituting fixed income, as the date approaches. Now, TD Ameritrade has put together a family of ETFs that allow investors to make lifecycle investments at a lower cost -- 65 basis points -- than the lifecycle mutual funds.
The TDAX Independence Exchange Traded Funds series from XShares Advisors provides investors with 5 target date funds -- 2040, 2030, 2020, 2010, and its Independence in Target Fund (designed for a near term target. The table depicts the funds asset allocations at inception and target date.
Assets will be adjusted as the target date approaches, from a more aggressive allocation that emphasizes equities to a more conservative allocation, that emphasizes fixed income. Each portfolio is designed to have 89%fixed income, 3% international equity, and 8% domestic equity on the target date. After reaching the target date, the allocation is adjusted over 5 years to 68% fixed income, 8% international equity, and 24% domestic equity. The table below shows the starting and ending breakdowns for each fund.
What the experts say
In a recent article, noted retirement experts Zvi Bodie and Jonathan Treussard of Boston University discussed how appropriate Target Date Funds were for people in planning their retirement.2 They note that many people in self-directed retirement plans, such as IRAs and 401ks may not know enough about investing to choose the right funds, or may not put in the time and effort to find them. Simple target date strategies may be an improvement over many of the choices made by people who do not know that much about planning. (And let’s not forget the fact that employers do little to educate their employees in this area). Bodie and Treussard observe that there are certain people for whom a target date fund is a good solution. Others, however, may be more risk averse or have a higher exposure to market risk through their means of earning an income, and may benefit more from a investments that have greater safety and are matched to their retirement date, such as Zero Coupon TIPS (Treasury bonds with prices that adjust upward for inflation) with a maturity date matching their retirement. Investors need to consider their risks when choosing retirement fund options.
Thursday, May 29, 2008
Passions run High on Indexing
It was quite a surprise for the debate over fundamental indexing vs. market-cap indexing to make it to the front page of the New York Times Business Section, but it has. In an article entitled, Passions run High on Indexing, by editor Joe Nocera, that appeared in the 17 May 2008 issue of the New York Times.
While few people can probably get excited about how indices weight their components, it matters to people in the ETF industry, because ETFs make money simply by having more assets under management. Any fund that has a secret formula for providing better returns may attract more investors.
The basic premise behind fundamental indexing, as proposed by Robert Arnott of Research Affiliates who has created the fundamental indices that underlie many Powershares products. His basic contention is that market cap weighting overweights the overweighted and underweights the underweighted, leading to underperformance in the long run.
His opponents claim that his system is not indexing. This is incorrect. It is simply an alternate form of weighting. Indexing is simply tying an investment to a particular index. The debate has gotten highly mathematical and arcane. Only time will tell who is right. However,
Arnott should not be counted out, as there is no doubt he is a very smart man -- he collaborates frequently with Peter Bernstein of Against the Gods: The Remarkable Story of Risk fame.
The other problem with many of his opponents' argument, is they see the S&P 500 as the “market.” This is not correct, as the S&P is not some unbiased measure of the “market” but 500 large cap stocks selected by the index committee at Standard & Poor’s according to criteria known only to themselves.
While few people can probably get excited about how indices weight their components, it matters to people in the ETF industry, because ETFs make money simply by having more assets under management. Any fund that has a secret formula for providing better returns may attract more investors.
The basic premise behind fundamental indexing, as proposed by Robert Arnott of Research Affiliates who has created the fundamental indices that underlie many Powershares products. His basic contention is that market cap weighting overweights the overweighted and underweights the underweighted, leading to underperformance in the long run.
His opponents claim that his system is not indexing. This is incorrect. It is simply an alternate form of weighting. Indexing is simply tying an investment to a particular index. The debate has gotten highly mathematical and arcane. Only time will tell who is right. However,
Arnott should not be counted out, as there is no doubt he is a very smart man -- he collaborates frequently with Peter Bernstein of Against the Gods: The Remarkable Story of Risk fame.
The other problem with many of his opponents' argument, is they see the S&P 500 as the “market.” This is not correct, as the S&P is not some unbiased measure of the “market” but 500 large cap stocks selected by the index committee at Standard & Poor’s according to criteria known only to themselves.
Leveraged ETFs -- Twice the Risk but not twice the return
A recent article in the Journal of Financial Planning. raises significant concerns about the use of leveraged ETFs -- those that multiply an index to increase the returns.
"Leveraged ETFs: A Risky Double That Doesn’t Multiply
by Two" by William J. Trainor, Ph.D., CFA and Edward A. Baryla, Jr. Ph.D.
Journal of Financial Planning, May 2008. pp 49-55.
This article investigates the performance of leveraged funds, those funds that are designed to multiply the return of a particular index. However, the ways the funds appear to work, means that the funds have some extra risks associated with them. The study comes to some important conclusions:
While leveraged ETFs can multiply index returns on a day-by-day basis, long run returns can not be multiplied by the same ratio because f a phenomenon known as the constant leverage trap and the lognormal nature of continuously compounded returns.
While many leveraged ETFs meet their specific daily targets, there is quite a bit of volatility related to meeting their targets on any particular day.
After using Monte Carlo simulations, the authors found that a typical 2X leveraged fund magnifies the index return only 1.4 times on an annual basis, for holding periods up to ten years. But the risk, as measured by standard deviations, stays double, or in some cases even quadruples in cases of extreme negative returns.
The authors compare leveraged ETFs to buying an index fund using a margin account and shows that the leveraged ETFS are superior in the long term due to their lower cost.
They caution long term investors to be wary of the risk/return tradeoff of leveraged ETFs, given that these types of funds can have extreme swings in value. However, they note that leveraged ETFs could be useful for short term investors/traders who are willing to take the risk and are taking a distinct position on the market.
"Leveraged ETFs: A Risky Double That Doesn’t Multiply
by Two" by William J. Trainor, Ph.D., CFA and Edward A. Baryla, Jr. Ph.D.
Journal of Financial Planning, May 2008. pp 49-55.
This article investigates the performance of leveraged funds, those funds that are designed to multiply the return of a particular index. However, the ways the funds appear to work, means that the funds have some extra risks associated with them. The study comes to some important conclusions:
While leveraged ETFs can multiply index returns on a day-by-day basis, long run returns can not be multiplied by the same ratio because f a phenomenon known as the constant leverage trap and the lognormal nature of continuously compounded returns.
While many leveraged ETFs meet their specific daily targets, there is quite a bit of volatility related to meeting their targets on any particular day.
After using Monte Carlo simulations, the authors found that a typical 2X leveraged fund magnifies the index return only 1.4 times on an annual basis, for holding periods up to ten years. But the risk, as measured by standard deviations, stays double, or in some cases even quadruples in cases of extreme negative returns.
The authors compare leveraged ETFs to buying an index fund using a margin account and shows that the leveraged ETFS are superior in the long term due to their lower cost.
They caution long term investors to be wary of the risk/return tradeoff of leveraged ETFs, given that these types of funds can have extreme swings in value. However, they note that leveraged ETFs could be useful for short term investors/traders who are willing to take the risk and are taking a distinct position on the market.
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