Oil Under $80: Here's What It Means For ETFs

November 05, 2014

Cheap Oil Losers: Alternative Energy

Ticker Fund Name 1 Month 3 Month 1 Year 5 Year
TAN Guggenheim Solar -4.70% -1.17% 2.64% -11.62%
PBW PowerShares WilderHill Clean Energy -2.73% -1.73% -4.55% -7.43%
QCLN First Trust NASDAQ Clean Edge Green Energy -2.81% -3.28% 6.01% 6.42%
GEX Market Vectors Global Alternative Energy -1.65% -5.21% 4.50% -1.44%
PBD PowerShares Global Clean Energy -1.23% -1.16% 7.59% -3.52%
ICLN iShares Global Clean Energy -1.97% -5.95% 0.25% -10.26%
FAN First Trust ISE Global Wind Energy -3.19% -11.71% -1.22% -5.16%
KWT Market Vectors Solar Energy -4.53% -4.24% 0.75% -16.56%

I'm an environmentalist at heart, so it pains me to say this, but the complex of eight ETFs covering the renewable energy space does terribly in a world of cheap oil. After all, if you can get cheap oil to heat your house or power your factory, why are you going to pony up for a windmill or a solar panel?

Alternative energy products all have a breakeven based on the price of alternatives. If it costs $2,000 a year to heat your house with oil, and $20,000 to install a geothermal system, well, you have a 10-year payback. If the price of oil drops enough to make that $1,000 a year, well, a 20-year payback starts seeming like an awfully long-term investment.

Frackers Vulnerable

That breakeven math hits another group of companies even harder: fracking firms. Depending on whom you believe, the profitable point for fracking oil out of the ground is between $75 and $95. With oil flirting at the bottom range of those numbers, frackers are starting to face the same inexorable math that gold miners have been facing: At some point, it makes more sense to stop producing oil than to keep paying roughnecks to man the pumps.

A quick look shows how the one ETF tracking frackers, the Market Vectors Unconventional Oil & Gas ETF (FRAK | B-21), and the largest renewables ETFs, the Guggenheim Solar ETF (TAN | B-40) and the PowerShares WilderHill Clean Energy ETF (PBW | B-16) have weathered the latest oil news:


Just as important as the downdraft from oil, however, is the updraft all three funds received as the stock market itself has recovered in the past few weeks. Equities are, after all, always equities, no matter how tied they are to a particular commodity. Still, should oil sit under $80 for a long time, these would be hard ETFs to own.


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