In 2010, the PowerShares Global Wind Energy ETF (PWND) was down a whopping 36%, after gaining nearly 32% in 2009.   With prices so low, 2011 might just be a good time to buy. 

Steve Schueth, President of Colorado-based First Affirmative Financial Network, an independent RIA that specializes in socially conscious investing, is cautiously optimistic.    "For some investors, that would be a very viable strategy, especially those who don't currently have much or any exposure to this space."

The downside is that those investors will have to assume some risk, "because there's no guarantee that, even though prices are very low, they won't go lower and there's no guarantee as to when they'll come bouncing back," Schueth says.  "With some of these companies, the business is very solid, it's just that the stock price is extraordinarily depressed," he says.

Other investors seem to agree with Schueth's view of the fundamentals.  Despite the poor performance of many wind energy stocks in 2010, global investment in clean energy hit record levels and the gains for wind were dramatic.  Total investment in wind grew 31% in 2010, and 38% of this increase was from growth in China and in large European offshore wind farms, according to Bloomberg New Energy Finance. 

For global growth in 2011 to out-pace 2010, it will have to be a very solid year.  Yet, early signs are encouraging, with Bloomberg projecting decreases in the costs of wind turbines and increases in the levels of available financing for alternative energy projects.

Challenges Ahead
Concerns about the rapid increase in global energy demand and the depletion of traditional energy sources are important long-term positives for wind power.  But the most pertinent day-to-day driver for companies operating in the wind energy space is the price of electricity, which is currently set by the price of natural gas, because utilities use gas during periods of peak power demand.  "Right now, natural gas prices have become quite competitive," says Abraham Bailin, an ETF analyst at Morningstar.

When gas prices are high, electricity costs can be high enough to make wind-generated energy cost competitive.  But natural gas prices are expected to remain low for the foreseeable future, because drillers recently perfected technologies that allow them to unlocked decades' worth of gas trapped in rock formations deep underground.  The downside is that these new drilling methods involve hydraulic fracturing of the rock, or "fracking," a controversial process that can contaminate drinking water supplies and which Congress has asked the Environmental Protection Agency to investigate.

And alternative energy in general has another huge challenge -- minimal government incentives for investment.  The industry is "competing against the heavily entrenched and very politically-connected fossil fuel industry," says Schueth. 

Indeed, the Government Accountability Office says the fossil fuel industry receives almost five times the tax incentives that renewable energy does.  This puts alternative energy, including wind, at a serious competitive disadvantage, Schueth says.

Diving In
If investors can handle the industry's headwinds, they might want to start with an ETF.  Morningstar's Bailin says the two wind ETFs he covers "are an aggregation of some of the best players in the global alternative energy space." 

Some of the largest holdings in these funds are companies based in China, Spain and Germany.  The ETFs include both "pure-play" wind companies that are primarily producers, distributors or manufacturers of wind energy and wind turbines, as well as multi-national companies with significant (but not exclusive) business from wind-related activities. 

The PowerShares Global Wind Energy ETF (PWND) tracks the NASDAQ OMX Clean Edge Global Wind Energy Index. The index gives an aggregate weight of 90% to pure-play wind companies and 10% to multi-nationals. The First Trust Global Wind Energy ETF (FAN), which seeks to replicate the ISE Global Wind Energy Index, has almost twice as many holdings as PWND, but allocates only a 67% weighting to pure-play wind companies.  The funds overlap significantly.  As of late January, a position in either fund rendered no less than 69% exposure to the other, according to Bailin.

He cautions that positions in these ETFs "should be relegated to a satellite holding status."  Bailin recommends placing no more than 5% of a portfolio in alternative energy stocks overall, "because of the highly speculative nature of an investment in this type of vehicle, even if it's a broadly diversified vehicle."

Tom Moser, who manages portfolios of clean energy, clean water and healthy food stocks at Tucson-based High Impact Investments, has about 20% of his alternative energy portfolio in wind.  For those brave enough to bump up their investing leverage by picking individual equity securities, Moser suggests looking for companies with technologies that can't be easily replicated.  He thinks the first wave in wind technology has passed and the industry is in a transformational stage.  "You can only make a blade so big," he says.

As an example of the potential for paradigm shift, Moser points to Catch the Wind (CTW.V), a speculative company with a laser technology that optimizes wind turbine efficiency.  Although it's too early for him to invest, he thinks the company has potential.    

Moser currently owns American Superconductor (AMSC), a company that makes wind turbine components.  "Its revenues, over the past year, have increased.  It's not a cheap company on a market capitalization basis, but it's weathering the storm in alternative energy better than many other companies," he says.

Moser is careful about investing in Chinese companies because of transparency issues, but he does own A-Power Energy Generation Systems (APWR), which makes power equipment, including wind turbines.  He likes the company's low debt and says it has "potential for doubling or tripling of share price over the next couple of years."        

Wild Cards
In this turbulent industry, anything can happen and investors need to watch several variables in 2011.  One of the most important is natural gas.  A price spike could speed up drilling, but problems with gas extraction (like tighter regulation of fracking) could slow drilling.  Yet, even if drilling declines, storage levels are above their 5 year average, which could help keep prices down.  It's anyone's guess.  As Bailin puts it, "Accounting for changes in the natural gas space adds to the difficulty of investing in wind."

-- By Leila B. Boulton