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Measuring Green Investing Success

Eco-friendly investors now have a tool to gauge the performance of their hip new "green" investing strategies. Earlier this month, Renaissance Capital, LLC launched its Green IPO Index, comprised of public companies focusing on environmental issues such as alternative energy, recycling, conservation, clean transport, energy efficiency, and green enabling technologies.

Renaissance created the index in response to the growing demand for environmentally friendly investments. In addition to the social aspects of green investing, Renaissance notes that newly public alternative energy companies have typically enjoyed abnormally high returns. With its low correlation to the S&P 500 Index, the Green IPO Index also offers investors a means of diversifying their portfolios.

To construct the index, Renaissance screens companies for minimum size and liquidity thresholds, and weights each holding based on its float-adjusted market capitalization. The index is rebalanced quarterly, and constituents are removed on the second anniversary of their IPOs.

Currently, more than half of the 24 companies in the index are solar companies, including First Solar (Nasdaq: FSLR  ) , JA Solar Holdings (Nasdaq: JASO  ) and LDK Solar (NYSE: LDK  ) . Other companies include Nymex (NYSE: NMX  ) , a commodity futures exchange specializing in energy and precious metals; Rubicon Technology (Nasdaq: RBCN  ) , which produces components for LED and other optical applications; and American Water Works (NYSE: AWK  ) , a water and wastewater service provider.

Given its industry concentration, and the size and age of its constituents, the Green IPO Index is more volatile on a short-term basis than other indices. In the first half of 2008, it lost 30.1%, while the S&P 500 and Russell 2000 gave up 12.8% and 10.9%, respectively. However, its three-year return of 42.7% far outpaced the 6.6% return of the S&P 500, and the 5.5% of the Russell 2000. It also beat Renaissance's diversified IPO index, which returned 18.5%, thus proving that being green and making greenbacks aren't always mutually exclusive.

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Fool contributor Linda Brewton does not own shares in any of the companies mentioned. The Fool has a disclosure policy.

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