The Ethanol Business

Ethanol can be made out of different feedstocks, such as sugarcane, corn, barley, wheat and cellulose, to name but a few. In order to become more sustainable, the ethanol business has been looking for ways to increase its net energy output and avoid competition with food stocks since the industry has been heavily criticized for not being as green as it is cracked to be and for driving a rise in the cost of food, especially in poor countries.

Considering how much attention biofuels attract, is investing in the ethanol business a good way to make money? Government surely is giving the ethanol business financial incentives, subsidizing farmers and encouraging U.S. refiners to replace MTBE (methyl tertiary-butyl ether, which is added to gasoline to make combustion cleaner) with ethanol. Still, not all ethanol companies are turning a profit so it remains a risky type of investment, although one ethanol ETF (exchange-traded fund) has been attracting good reviews. An ETF trades like stock at approximately the same price as the net asset value of its underlying assets over the course of the trading day.

PowerShares WilderHill Clean Energy (AMEX: PBW) has returned 3.4% between January and February 2010. According to Motley Fool, the main reason to consider buying the PBW ethanol ETF is the ethanol business and renewable energy as a whole. The market will grow by $110 billion in the next seven years, with energy costs accounting for 6.2% of household spending. Elsewhere, Morningstar highlights that the PBW ethanol ETF is cheap to own: it costs only 0.70% annually.

Those interested in investing the ethanol business through an ethanol ETF should consider a few criteria, says Cleanenergywonk. These include expense ratio, index composition, index weighting, turnover and availability and liquidity of exchange traded options. The most common criticism of ETFs is the unknown, untested indexes used by many providers. But even critics agree that a broadly diversified ETF held over time can be a good investment.