Green mutual funds invest in alternative energy and water conservation companies.
Green mutual funds invest in companies that follow sustainable business practices and develop eco-friendly products and services. As of March 2011, investors can choose between more than a dozen mutual funds focused on such environmental concerns as alternative energy, solar power and water conservation. Some funds invest broadly in a combination of these technologies, while others focus on any type of company so long as it follows a documented sustainability model and operates in clean, environmentally-sound ways.
The Basics
As new technologies emerge, two types of companies typically are behind them: small entities that can pose risky investments on their own, and large companies with stock prices beyond the typical investor. Bringing together eco-oriented and sustainable companies in green mutual funds offers exposure to all stock types while reducing the risks of buying individual stocks in fledgling, volatile or expensive markets. Green mutual funds charge moderate to high expense ratios --- usually from 1 percent to 2 percent --- and typically require minimum investments of $2,000 to $5,000.
Alternative Energy Funds
Alternative energy mutual funds focus on emerging approaches to generating safe, clean energy. These global funds hold the stocks of U.S. and international companies in the clean energy sector, including makers of wind turbines and solar cells. Other companies held by these funds generate electricity with geothermal energy, which relies on the Earth's heat-generating properties; hydro energy, which harnesses the power of waterways; and biomass energy, which creates energy from the natural decomposition of biological materials.
Global Water Funds
Water mutual funds track all types of companies engaged in water-related businesses. These companies include water utilities as well as the makers of irrigating, pumping and filtering equipment. Some companies focus on water treatments such as desalination or disinfection, while others provide consulting services for the collection and treatment of water for both homes and businesses. As with other eco-oriented green funds, the companies held in typical water portfolios include both U.S. and international entities.
Sustainable Company Funds
Mutual funds that invest in sustainable and environmentally-friendly companies go by names that include the words like "sustainability," "green" and "alternatives." You'll need to dig deep into a fund's holdings to understand which companies are included in the portfolio and why. Companies are chosen because they operate in ways that minimize their impact on the environment or offer products and services that solve environmental problems. These funds often invest in green building and transportation.
Green Investing ETFs
In addition to traditional mutual funds, several exchange-traded funds offer green investing opportunities. These funds, also called ETFs, hold baskets of stocks the same way mutual funds do, but they are traded differently than mutual funds. The primary advantage of ETFs is their lower expenses, and they tend to focus tightly on specific niches. Investors can select from at least a dozen green ETFs covering water companies, solar energy developers, alternative energy producers and waste management firms.
