How Alternative Energy Mutual Funds Work

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.

Before you invest in an alternative energy mutual fund, you'll need to do a lot of homework.

First, learn as much as you can about alternative energy sources. As you read, ask questions:

Next, carefully research individual mutual fund companies. Use authoritative web resources such as Morningstar to gather information about the funds.

Compare the information you've gathered with information from the Web sites of the mutual funds you're interested in. Remember that some of the information on the mutual fund sites will be biased in favor of the fund and what it can do in terms of performance.

Order a prospectus from each mutual fund you're interested in. The prospectus will give you detailed information about the fund, including all of the fees that you can expect to pay.

If the prospectus meets with your approval, you can either buy shares in the fund directly from the fund company or from an online broker such as Etrade, Ameritrade or Charles Schwab.

Alternative energy mutual funds represent one way that you can profit from a sector that's getting a lot of press today. Owning a group of companies as opposed to owning individual companies tends to lower your risks. Be aware, however, that any investment carries a certain amount of risk. What would happen, for example, if the price of oil suddenly went down considerably? Would alternative energy companies lose their favor in the investment community?

Also, just because a professional is managing the stocks in your mutual fund, this doesn't mean you should forget about your investment. Be proactive by frequently checking the status of your fund on an online brokerage site. Also, carefully study the quarterly statements you receive from the fund company. Your vigilance will pay dividends in many ways.

If you'd like to learn more about alternative energy mutual funds and related topics, you can follow the links on the next page.