Green Funds: Less Than Meets the Eye

Ways to invest in environmentally focused vehicles are still limited, and portfolios may harbor a few surprises—like oil and casino stocks

by Alex Halperin

Green investing isn't such a lonely pursuit anymore. With society's greater emphasis on renewable energy sources and technologies to limit greenhouse gas emissions—witness Al Gore's conquering-hero status at this year's Oscar awards as he picked up a statuette for his climate change documentary An Inconvenient Truth—there is increasing attention paid to this approach.

Unfortunately for investors, mainstream enthusiasm for green companies doesn't always translate into the green that lines wallets. But green is a term that's open to interpretation. Take General Electric (GE). Although the conglomerate has a leading position in green energy like wind power, some of its operations infuriate environmentalists. Meanwhile, small pure-play companies can't turn a profit. Wading into the green pool, investors may find it safer to play diversified indexes and mutual funds rather than pick out the eventual winners in a crowded field.

There aren't too many green stock indexes, ETFs, and mutual funds available to American investors. More surprisingly, funds that proclaim themselves eco-friendly sometimes have radically different investing philosophies. And because renewable fuels still hold a tiny share of the market compared to, for example, oil companies, their shares can be wildly volatile. Entering the fray, Standard & Poor's last week started the S&P Global Clean Energy Index. (S&P is owned by BusinessWeek.com parent The McGraw-Hill Companies(MHP).)

"Like a lot of investments it depends on who you are and why you're using them," says William Rocco, an analyst with Morningstar (MORN). He think green investing vehicles work best as smaller riskier bets—the spice to an otherwise solid portfolio—warning that "trendiness in these kind of things makes me worried."

To help sort the out the opportunities in this intriguing corner, this week's Five for the Money takes a look at some of the options out there. As usual, investors should be careful: Saving the planet and improving your retirement aren't necessarily compatible goals.

1. Sierra Club Stock Fund

When investors think of mainstream green investing, the Sierra Club Stock Fund (SCFSX) is probably pretty close to what they have in mind. The fund filters almost 2,000 large companies according to rigorous criteria. It eliminates companies involved in practices including nuclear power, tobacco, fossil fuel extraction, and agricultural practices like "concentrated animal feeding" and developing genetically modified organisms.

Of the few hundred names that survive the screen, the fund picks out the largest 100, according to Garvin Jabusch, director of sustainable investing at Sierra Club Mutual Funds.

As in many green funds, smokestack-free sectors like financials, health care, and tech feature heavily in the portfolio. But taking a look at some of the largest holdings can help explain why green investing isn't so cut-and-dried. As of Jan. 31, two of the largest five holdings in the portfolio were casino giants Las Vegas Sands (LVS) and MGM Mirage (MGM). Even for those socially conscious investors willing to invest in gambling, one could argue that the choices look counterintuitive. Without major online operations, these companies' revenues depend on millions of tourists flying and driving long distances, each contributing their bit to climate change. It also doesn't consider the juice needed to light the Las Vegas strip. This would seem to contradict the fund choosing to hold no car manufacturers and only one airline, Southwest (LUV).