From the September 2007 issue of Entrepreneur

After seeing a screening of An Inconvenient Truth last fall, 31-year-old Karyn Ravin regretted ever leasing her gas-guzzling Nissan Pathfinder. She should have bought a Toyota Prius, she sighed. But with one more year left on her SUV's lease, Ravin opted for the next best green thing--100 shares of Toyota Motor (TM), an auto company known for its dedication to fuel efficiency. "It was doing our little part," says Ravin, owner of Maletzky Media, a boutique PR and marketing firm in New York City. So far, the stock's been friendly to her broad-based retirement portfolio, climbing roughly 15 percent since she bought it last September.

Indeed, green is the new black on Wall Street, with individuals increasingly placing bets on eco-friendly stocks, mutual funds and exchange-traded funds (ETFs). "People understand you don't have to sacrifice returns to invest in an environmentally responsible way," says Jack Robinson, lead portfolio manager of the Winslow Green Growth Fund.

While some financial experts preach that the greener the investment, the better, there are potential downsides. "It's a speculative sector as a whole," says John Quealy, analyst at financial services firm Canaccord Adams. For one, this sector is vulnerable to the demand for traditional energy.

"If we saw oil go back down to $50 [a barrel], all of a sudden there's not going to be as much demand for green stocks," says Tom Lydon, editor of ETFTrends.com, a blog about ETFs.

What's more, investors should watch out for bursting bubbles within certain sub-industries, like solar, whose capital investments, experts caution, run the risk of outpacing demand. "It looks to me like too much manufacturing capacity is coming on too quickly," says Jim LoGerfo, founder of Vortex Energy LLC, a financial advisory firm. He compares today's solar popularity to the 2006 heyday of ethanol, when biofuel project financing was up 1,700 percent from 2004, according to researchers at New Energy Finance. "Both industries are being hugged to death," says LoGerfo.

Some ways to hug the world but curb your risk:

  • Mutually Green: Green mutual funds are popular because they offer diversified sector exposure. The Winslow Green Growth Fund (WGGFX) invests in 30 to 40 small-cap, high-growth green stocks. "Green" to Winslow means promoting healthier lives, plain and simple. Some of the highest-growth players in the no-load portfolio include Green Mountain Coffee (GMCR), Chipotle Mexican Grill (CMG) and Fuel-Tek (FTEK). The Green Century Balance Fund (GCBLX) and the Spectra Green Fund (SPEGX) are two other mutual fund options.
  • ETFs--Pure and Liquid: For pure exposure to a certain index of green companies, like simply solar or clean tech, experts recommend ETFs, which trade like stocks, so they're more liquid than mutual funds. PowerShares Wilderhill Clean Energy Portfolio (PBW) and the New Alternatives Fund (NALFX) are widely popular.
  • Stocks With Green Ingredients: Adding, say, GE or Toyota, industry-leading stocks with active green initiatives, to an existing portfolio can also give investors green exposure while mitigating risk. Others include Applied Materials (AMAT), Dell (DELL) and Google (GOOG). One caveat: These companies may not see direct revenue gains from their green doings as quickly as "pure" green stocks. "If you bought Applied Materials today, for example, you are buying something that, in terms of revenue, is not a 'clean tech' company. Give it three years," says LoGerfo.

Ravin says she'll hold on to her Toyota shares for the long haul, in addition to trading in her SUV for a Prius when her lease is up: "We're trying to make our carbon footprint as small as possible."

Farnoosh Torabi is a correspondent for TheStreet.com TV.