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How Alternative Energy Mutual Funds Work

What is an alternative energy mutual fund?
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An alternative energy mutual fund is a company that pools money from its investors and invests it in a group of companies that are engaged in some way in the development of alternative energy resources, such as wind, geothermal or solar energy. The major alternative energy mutual funds also invest in companies that promote a clean environment.

Alternative energy mutual funds are a relatively new phenomenon. Here are two of the best-known funds.

The New Alternatives Fund, which trades under the ticker symbol NALFX, began operations in 1982. It was the first mutual fund to concentrate on alternative energy. Its objective is to provide "long-term growth of capital through environmental investment" [Source: New Alternative Funds]. In 2008, the fund had investments in a variety of companies focusing on renewable energy sources, as well as interests in companies focusing on energy conservation and environmental protection.

The Guinness Atkinson Alternative Energy Fund, which trades under the ticker symbol GAAEX, began operating in 2006. The fund's strategy is "long-term capital appreciation by investing in equity securities of companies involved in alternative energy or energy technology sectors." The fund invests in global companies that "derive more than 50 percent of their revenue from alternative energy or alternative energy technology" [Source: Guinness Atkinson Funds].

For your investment, you become a shareholder in the fund. As long as the fund isn't closed, you can buy more shares of stock at any time. You can also sell your stock whenever you want.

This solar plant in Spain, the largest in Europe, is capable of producing 11 megawatts of electricity. Alternative energy mutual funds often provide the funds for the construction of such plants.

Before you invest, you'll want to look at a stock index, which measures the value of a given group of stocks. The index reports this value as an average that fluctuates as the market moves. How the average is calculated depends on the index. Some indices assign weights to different stocks based on liquidity or other criteria.

An alternative energy index, as you might guess, tracks the value of a group of alternative energy stocks. There are several major alternative energy indices. Some are global; some focus on companies in a specific region. Some track companies whose main business is alternative energy; some track companies that simply have alternative-energy initiatives. A few examples:

The S&P Global Alternative Energy Index tracks the performance of publicly traded alternative energy companies. It draws from two other Standard & Poor's indices: companies devoted to clean energy and nuclear energy companies.

The World Alternative Energy Index, run by Dow Jones, tracks the 20 largest global stocks in renewable energy, energy efficiency and distributed energy.

The Ardour Global Alternative Energy Index tracks companies that are pure play -- that is, "principally engaged in the field of alternative energy" [source: Ardour Global Indexes]. Ardour Global also runs the New York Mercantile Exchange's Alternative Energy Index.

Other global alternative energy indices include DAXglobal and Credit Suisse. Regional indices include ALTEXAustralia and the U.S.-focused Ludlow. Wilderhill has both global and regional indices that focus on clean energy.

So if you think you're ready to begin the research to invest in an alternative energy mutual fund, we'll show you where to begin on the next page.

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