Renewable energy funds are booming

NEW YORK (CNNMoney.com) -- Since the start of the year, the small but growing pool of funds specializing in renewable energy have posted solid returns, in many cases beating the pants off the S&P 500.

The mutual funds include the New Alternatives Fund (Charts) and the Guinness Atkinson Alternative Energy Fund (Charts).

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Exchange traded funds, which can be bought or sold like stocks, include the PowerShares WilderHill Clean Energy (Charts) fund, the PowerShares WilderHill Progressive Energy (Charts) fund, the Market Vectors Global Alternative Energy (Charts) fund, and the First Trust NASDAQ Clean Edge US Liquid (Charts) fund.

The New Alternatives fund is up nearly 37 percent the last 12 months and 20 percent so far this year. The Guinness Atkinson fund is up 17 percent and 27 percent while the Wilder Hill funds, which launched last fall, are each up about 11 percent this year.

By comparison, the S&P 500 has climbed about 21 percent over the last 12 months and is up about 5 percent this year.

There was a time when investors could count on losing a few percentage points in returns in exchange for making "green" or "socially responsible" investments, but one analyst said that is changing.

"I don't think they exceed expectations, but I don't think they disappoint either," said Jeff Siegel, managing editor of Green Chip Stocks, an investment newsletter focusing on environmentally friendly companies.

Seigel said the number of funds dedicated to alternative energy is growing rapidly.

On Wednesday Calvert, purveyor of socially responsible mutual funds, announced that it too is getting in on the alternative energy investing game, promoting its Calvert Alternative Energy Fund in response to what it said was overwhelming investor interest in the sector.

Calvert cited a survey, conducted on its behalf by the polling group Opinion Research Corp., that said more than three quarters of investors are concerned that global warming will bring about major changes in their lifetime or the lifetime of their children.

But only one in five investors who use a financial professional said they had discussed investing in alternative energy with a financial adviser, the survey found. Four out of five said there should be more alternative energy mutual funds for investment.

"This is a big disconnect," said Graham Huber, a project manager at Opinion Research. "There is strong U.S. investor interest."

Jens Peers, portfolio manger for the new Calvert fund, said he will invest in about 150 companies, mostly from Europe, the United States, China and Japan.

Jens said about 80 percent of the companies will be "pure plays," meaning the firms get 50 percent or more of their revenue from business in alternative energy.

The remaining 20 percent will be "market leaders," larger firms like GE (Charts, Fortune 500) or BP (Charts) that are big players in the industry but don't get most of their sales from renewables.

The growth in alternative energy mutual funds follows a pattern of surging overall investment in the sector.

In 2004, money flowing to renewables worldwide was about $28 billion, according to the American Council on Renewable Energy. By 2006 that number jumped to nearly $71 billion.

Like all mutual funds, ones focused on alternative energy have their pros and cons.

On the plus side, experts say the professional money management you get in some of these funds is needed when investing in such a young industry.

"Lots of these companies never make it, and it's tough to pick out the ones that survive," said William Buechler, founder and president of Barclay Partners Asset Management, a money management firm based in La Jolla, Calif.

But in addition to the fees, which generally range from 1 to 2 percent, investors may not like being stuck with the stock choices of someone else.

"It always seems to me that there are a number of companies they purchase that I just don't think are that good," said Buechler. "I think it's better for the individual investor to put the time in, do the homework, and select their own companies."