What’s the best way to invest in electric cars and hybrid vehicles? – via email

The long-held dream of a mainstream zero-emissions vehicle is, for now, still a dream. There have been significant advancements in electric vehicles, but these products still face a bumpy road.  For example, the all-electric Nissan Leaf has been beset by technical quirks, but most troubling, the car’s much-touted driving range of 100 miles is actually closer to 75 miles in real world conditions. For most drivers, that limited range doesn’t justify the price tag. This is not to say that we don’t believe electric vehicles could be the wave of the future. Rather, we think that it’s still a speculative bet at this point.

What’s not in doubt is that the US is moving toward higher mileage and emission standards for automobiles. The Obama administration has reportedly proposed new regulations that would require US cars and trucks to achieve an average 56.2 miles per gallon by 2025, or almost double the current average. This will require an annual fuel efficiency increase of 5 percent each year from 2017 to 2025.

Automakers are understandably reluctant to adopt these standards, fearing the capital required to develop these new vehicles and uncertain consumer demand. However, it should be noted that the proposed regulations would bring the US on level with fuel efficiency standards in Europe, China and Japan.

The devil will be in the details, but the larger trend is unmistakable. The world is moving toward more stringent mileage and emissions standards. This will require automakers to build cars fitted with catalytic converters featuring large quantities of platinum and its sister metal palladium.

Of the two metals, palladium is considered the better catalyst for gasoline-powered engines, and autocatalysts accounted for 58 percent of global palladium demand in 2010. Platinum is more suited to use in diesel engines, and autocatalysts ate up 40 percent of the global platinum supply last year. However, palladium is far cheaper than platinum and new technologies has increased use of the metal in both gasoline and diesel engines. Global demand for palladium in autocatalysts has grown by more than 33 percent between 2005 and 2010, compared to a 20 percent decline in platinum demand for use in autocatalysts.

We’re not suggesting that platinum’s a slouch. Platinum is critical to the manufacture of liquid crystal displays and some medical and dental applications. Most famously, platinum jewelry has found a receptive market in Asia, particularly in China.

But why choose between the two metals? Stillwater Mining (NYSE: SWC) is North America’s largest producer of platinum group metals, including platinum and palladium. The company produced 374,000 ounces of palladium and 111,000 ounces of platinum from its Montana mines in 2010. The company has also purchased a Canadian mine that management believes will produce 200,000 ounces of platinum group metals annually by 2014. Stillwater isn’t an investment for the faint of heart, but its shares have grown rich in recent months. However, the company does provide a back door investment in a greener automobile.

Do any mutual funds invest in privately held companies or are they required to invest only in publicly traded companies? – Dave Moore, via e-mail

Most private equity (PE) firms now sit on huge war chests of cash that must be either put to work in the markets or returned to their investors. Consequently, we’ve seen renewed interest from investors seeking to ride the PE investment wave. Unfortunately for mutual fund investors, that’s a challenging proposition.

Securities and Exchange Commission regulations dictate that mutual funds can only invest up to 15 percent of assets under management in illiquid securities. An interest in a PE deal falls squarely under that definition. Not only can those interests be difficult to sell in a pinch, they’re also notoriously challenging to value because a liquid market for these deals doesn’t truly exist.  Although many mutual funds own privately placed debt or equity issues from publicly traded companies (for which there is a very liquid market), no mutual fund’s portfolio is made up entirely of interests in PE deals.

The best alternative for mutual fund investors is to buy into a mutual fund that own shares of PE outfits, also known as business development companies (BDC). The problem with this strategy is that those stakes are diluted by other portfolio holdings and the mutual funds show little to no correlation to the broad PE industry.

The closest thing to pure play BDC exposure is an exchange-traded note (ETN) recently launched by UBS. UBS E-TRACS Wells Fargo Business Development Company ETN (NYSE: BDCS) tracks an index made up of 26 publicly traded BDCs, including firms such as Ares Capital Corp (NSDQ: ARCC), Apollo Investment Corp (NSDQ: AINV), and Main Street Capital Corp (NYSE: MAIN).

Business development companies are the definition of a niche market and the fund hasn’t attracted swarms of investors since its April launch; UBS E-TRACS Wells Fargo Business Development Company ETN has an average daily trading volume of about 5,000 shares. This is a fairly illiquid offering, which can be a problem if an investor seeks to exit the fund.

The fund’s annual expense ratio of 0.85 percent is reasonable, but this lack of liquidity should deter most investors. However, if BDC exposure is your goal, UBS E-TRACS Wells Fargo Business Development Company ETN is your best option.