ETF Expert

Some socially conscious investors are more interested in making a statement than making money. "You can do both," they say. And in principle, I agree wholeheartedly.

However, I believe it is an egregious mistake to put sound investing decisions on the back burner. One shouldn't stubbornly adhere to an investment that is losing… just to make a point. Understanding when and what to buy, as well as when and what to sell, matters every bit as much as dogma.

For example, many an environmentally conscious investor has chosen to hold "clean energy" ETFs through thin and thick. "It's the wave of the future," they'd insist. (And perhaps they are right.)

However, if one doesn't grasp the methods for avoiding big losses, or if one fails to identify the negative earnings in the companies of certain alt energy ETFs, one puts him/her self at a distinct disadvantage. Meanwhile, those who put the goal of investing gains first are the ones with the luxury to donate to worthy causes.

Perhaps I digress.

So let me make "my dogmatic point" with a very basic look at alt energy investing versus old school energy. Let's examine the PowerShares Wilderhill Clean Energy Fund (PBW) since its inception as it compares to the long-standing Energy Select SPDR (XLE).

Four years and 3 months ago, PowerShares introduced the Wilderhill Clean Energy Fund (PBW). And to be completely honest, it's still one of the best around in its category. (Note: There are now more than a dozen "alts" to the original… from "progressive," to global to nuclear to solar to wind to "cleantech.")

Yet the realities are pretty straight-forward. First, even in the boom years through the start of 2008, PowerShares Wilderhill Clean Energy Fund (PBW) was far more volatile. PBW rapidly rose above XLE and… even more rapidly… descended below XLE. Worse yet, by late 2007, the downward trajectory should have served as a warning shot across an investor's bow.

Second, and perhaps more importantly, XLE has a total return that is 4500 basis points higher. Even the most ardent clean energy advocate will have a difficult time closing the performance gap between +10% and -35%.

Keep in mind, PBW and XLE are highly correlated. Energy Select SPDR (XLE) may indeed rise slower than PowerShares Wilderhill Clean Energy Fund (PBW), but both funds tend to move in the same general direction.

Obviously, past performance doesn't predict future performance. And someone with money to invest today should only concern his/her self with the fund or funds that may achieve goals going forward. I happen to think the PowerShares Wilderhill Clean Energy Fund (PBW) is a great ETF vehicle… so long as you have a plan to sell.

In all, whether you like the prospects of the big oil producers in old school XLE, or whether you prefer to pursue an "alternative energy" route, consider stop-losses to minimize downside risk. Moreover, recognize that PBW is 1.75x more volatile than XLE… which you need to account for.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "LIVE", via podcast or on your iPod.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.