By John Wasik
CHICAGO, April 2 (Reuters) - Want to vote with your dollars when it comes to environmental concerns? One way is to invest in environmentally focused mutual and exchange-traded funds, although you may be trading your green conscience for increased portfolio risk.
People who are concerned about energy prices and climate change have put more than $3 trillion into the hands of managers who target positive environmental, social and corporate governance practices, encompassing more than 250 investment funds, according to the Forum for Sustainable and Responsible Investment's 2010 report on socially responsible investing.
Like any sector, environmental stocks are volatile. One year ethanol producers are hot, then sold off. Solar-panel manufacturers sizzle - and then fade.
I've found that green funds tend to overweight a particular sub-sector. Some managers may focus on water infrastructure, while others may hold a broader array of geothermal, biomass, solar, wind and energy-efficiency stocks.
When considering actively managed funds, you always encounter higher sector risk; managers can guess wrong on which will be the next hot industry.
Green funds were not immune to the travails of the market meltdown in 2008. They were sold off with the broader market and closely track it. If you take a look at the performance chart of a green fund such as the Market Vectors Environmental Services ETF, you can see it parallels the S&P 500 Index. When the index tumbled in late 2008, the Market Vectors fund followed, although slightly outperforming it over the past five years.
And, of course, in the real world, no one company is entirely clean and green, although these specialized managers attempt to find companies focused on sustainability and solutions to the global problems of resource depletion, energy consumption, pollution and climate change.
All of this is not to say that you can't do well in a green fund. Along with the rest of the stock market, their returns have blossomed recently. The Winslow Green Growth Fund is up about 13 percent year to date through March 30. The Fidelity Select Environmental and Alternative Energy fund has risen about 9 percent.
One of the biggest issues with green funds is that they haven't been around very long, so most of them don't have track records that run through several bear markets. Only a handful have been around for more than 10 years.
Ultimately, though, if you want the broadest-possible exposure to green investing, you'll need an index fund that covers much more ground and doesn't specialize in environmental companies. The Vanguard Total Market Index ETF samples more than 3,000 stocks, so your chance of owning the next Microsoft of green technology is more likely to be from holding that portfolio.
Costs are also much lower in the bigger index funds. The Vanguard fund, for example, has a 0.07 percent annual expense ratio for management fees. The Winslow fund, in comparison, charges 1.45 percent.
Even though there may be more losers than winners, green companies may be golden over the long term. Energy and resource issues are only going to get more challenging as more people crowd the planet and demand more water, electricity, fertilizer, oil, coal, metals and consumer goods.
Yet don't amplify the risk profile of your portfolio en route to doing the right thing. There are many more sensible ways to help the planet.