They may not make you an overnight millionaire, but investing in alternative energy ETFs can be a great way to gain initial exposure to renewable energy stocks.

For those that aren't familiar with them, exchange traded funds (ETFs) hold multiple assets—like stocks, bonds or futures—and can be traded daily on numerous stock exchanges.

Available domestically since 1993, ETFs are valued like a mutual fund (based on net asset value), but can be bought and sold throughout the day like a closed-end fund—allowing the price to fluctuate away from strict net asset valuation.

So an alternative energy ETF will be made up of a group of companies, which each make up a percentage of the ETF's assets.

Let's dissect one of the best-performing alternative energy ETFs to date, the Market Vectors Global Alternative Energy ETF (NYSE: GEX), which has returned 36% since it began trading on the New York Stock exchange a little over a year ago.

Alternative Energy ETF Holdings

The Market Vectors ETF lists the following companies as its top ten holdings:

• Cree Inc., 4.16%

• First Solar, 7.74%

• Gamesa 7.35%

• Itron Inc. 4.58%

• Kurita Water 5.2%

• Q-Cells 4.99%

• Renewable Energy 4.05%

• SolarWorld 4.81%

• Verbund AG 6.4%

• Vestas Wind Systems 15.65%

Those ten companies account for about 65% of the ETF's total holdings. So purchasing shares of this fund will give you proportional exposure to those companies, and to their increase in value, for as long as you hold the fund.

It is important to note here that ETFs can hold a variety of assets, and are not limited only to publicly traded companies. In the Market Vectors example, two of the top ten holdings are private. Other ETF holdings options include bonds and even futures.

Understanding how ETFs are structured offers a natural segue to their investment benefits.

Because exchange traded funds can hold a variety of assets, they are ideal for diversification.

And because of their low expense ratios and tax structure, ETFs have proven to be an exceptional option for long-term investments.

But because their focus can be so nuanced and they can be traded daily, ETFs are also a great vehicle to play market shifts and emerging opportunities—no matter which sector you're interested in getting a piece of. (For a more thorough list, check out this piece on clean energy ETFs.)

So far, alternative energy ETFs have been fairly limited by a broad umbrella. That is, ETFs in the clean space have taken some liberties with the definition. And a few hold companies that have only a part of their business operating in clean technology.

Other ETFs have become extremely focused. You can now by agriculture ETFs, gaming ETFs and even specific commodity ETFs.

I suspect we'll see increasingly targeted ETFs in the clean space as well. And we've already seen some evidence that that trend is headed our way with. . .

The First Solar ETF

The first sector-specific alternative energy ETF is the Claymore/MAC Global Solar Energy Index ETF (NYSE:TAN).

Its holdings run the gamut from silicon feedstock suppliers to finished module producers, from fairly new companies to established ones, and from domestic to international companies.

Showing the future ahead of the solar industry, Claymore's solar ETF holds 72.32% of its assets in small and mid-cap companies, with only 27.68% in large cap stocks.

By country, the TAN ETF breaks down like this:

• China 29.91%

• Germany 29.01%

• U.S. 26.33%

• Norway 7.32%

• Spain 4.29%

• Switzerland 3.13%

Unfortunately, the ETF hasn't performed as well as some of the companies it holds. Since April 15^th, when it began trading, it has gained roughly 7%. Solarfun (NASDAQ: SOLF), on the other hand, has returned 64% in the same time.

And therein lies one of the few problems with ETFs: short-term gains are sometimes sacrificed for long-term value. That's because the per share value of an ETF is a reflection of the net asset value of all its holdings.

If just one of the companies in an ETF has a great gain, its movement is unlikely to be realized in the value of the ETF.

Bottom Line: Alternative energy ETFs are a great way to gain broad exposure to the industry. And we're beginning to see more and more technology-specific ETFs.

If you're looking to diversify or you want a set-it-and-forget-it cleantech play, then an ETF could be right for you. Just make sure the fund holds the types of companies you're interested in.

On the flip side, those serious about investing in alternative energy can use associated ETFs as a base and trade individual stocks for greater gains. Used this way, the ETF can add to gains made on individual stock trades or hedge against the missteps taken along the way.

Call it like you see it,

Nick

P.S. Many of the successful companies held by ETFs are being played for profit in the Alternative Energy Speculator. As I mentioned in the article, playing stocks individually often presents a much better upside than holding a group of companies in an ETF. Recently, we've taken Solarfun for a 130% roller coaster ride. See how you can do the same.