Ethanol ETF

Is investing in ethanol companies a guaranteed way to make money? Government surely is giving the ethanol industry 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 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.

Industry specialists believe that the growing interest in renewable energy will energize the ethanol ETF sector. They cite improvements in fuel transportation with the construction of a pipeline by Kinder Morgan, a pipeline transportation and energy storage company, as one of the factors that will see a decrease in distribution costs and make ethanol stocks more attractive.

Those interested in investing in 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.