Until recently it has been a wild ride for long term investors in the Solar sector. Performance of Solar ETFs tracking the a basket of solar energy stocks has been mixed at best. Solar energy stocks has struggled due to declining PV cost per unit which appears to be bottoming. The decline in PV cost resulted in difficulties across the solar industry hence Solar ETFs had a volatile 2012 and 2013 where they under performed the market significantly.
Solar energy has been consistently the fastest growing sector within the alternative energy space. Total Global Solar PV capacity increased from 40 GW to 100 GW between 2010 to 2012. The top 5 countries leading additional investment in solar capacity led by Germany are Italy, China, United States and Japan.
Solar Energy Sector broadly can be broke down into
- Solar Photovolatic Cells with global capacity in 2012 10 times its 2007 size.
- Concentrated Thermal Power which over the same period grew 7 times its 2007 by 2012.
Solar ETF List
The ETF list below highlights 2 ETFs that invest solely in Solar stocks.
|Guggenheim Solar ETF||TAN||$467 M||27|
|Market Vectors Solar Energy ETF||KWT||$22 M||34|
Guggenheim Solar ETF (TAN)
TAN is the largest Solar ETF with AUM of $467mil. It is a low cost index tracker with the goal of replicating the return of MAC Global Solar Energy Index. The list of solar companies covers every aspect of the solar industry from producers, distributors and raw material suppliers. The categories of solar companies in the includes:
- Stocks of companies that make solar power equipment and final solar product for consumers
- Producers of solar fabrication products like equipment used to make solar cells and modules
- Solar service companies that provide specialized solar cell production and research and development consulting
- Companies that supplies raw material or parts for solar cell producers
- Consumer end solar distributors
Market Vector Solar Energy ETF (KWT)
KWT seek to track a similar solar company index. The companies in the ETF must have more than 50% of assets related to the solar related services. It is a passive index fund with a turnover rate average around 75% of the average value of the portfolio.
Investing in Solar ETF
Looking at ETF AUM on the above Solar ETFs. Investors at the outset should be conscious of possible liquidity risk of KWT. Simply with $22 Million under AUM, it has limited intraday liquidity for investors that are looking at building a decent position in the ETF. TAN on the on the other hand provides limited transaction cost exposure getting in and out of the ETF.
Table below shows the aggregate fundamental valuation metrics of the solar stocks in the exchange traded fund.
|Guggenheim Solar ETF||$3.3 Bil||2.42||44%||13.6||1.8|
|Market Vector Solar Energy ETF||$5.1 Bil||2.64||38%||13.4||1.8|
Average beta of Solar ETF at 2.5 and almost 50% standard deviation shows investing in either Solar ETF is not for the faint of heart. Unlike smart beta exchange traded funds which allocate funds in the portfolio based on fundamental factors like beta, volatility, p/e and p/b. Passive indexers on the other hand weights stocks by market capitalization.
Solar ETF Highlight – TAN ETF vs KWT ETF
- Average weighted market capitalization of Solar stocks in the ETF understandably are small and medium capitalized stocks. TAN focuses particularly on the larger listed Solar Companies vs KWT.
- Risk metrics shows the Beta and Standard Deviation are much volatile relative to the market. Average Beta of 2.5 means the ETF is 2 and half more sensitive to the market ups and downs. This can be attributed to the industry specific risk as recent years companies in the solar sector (reflected in the ETF) has been prone to global competitive pressures and uneconomic actions by Chinese solar companies. Similarly, this volatility can be seen in the standard deviation of the ETF price which extremely high at 50% vs low 20% of the market. (These ETFs are not designed for conservative etf portfolios)
- Using P/E and P/B measurement disclosed by the ETF providers. Solar stocks in both ETFs are of similar valuation.
Solar ETF Country Exposure
United States, China (Hong Kong) and Taiwan account for majority of companies in the ETF. Investing in these Solar exchange traded funds means investors has significant exposure to movement in exchange rates. Some stocks are also listed American Deposit Receipt It market which means they are traded in the US however they do not necessarily conform to US accounting rules. This is especially poignant in the Chinese stocks which has attracted major accounting issues in the past.
Top 10 Solar ETF Holdings
The number of solar companies included in both ETFs are of similar amount at around 30 positions. Analysis of top 10 solar company holdings in the ETFs shows while they have similar country exposures and both top 10 holdings account for almost 60% of the fund. However the underlying stocks can differ significantly.
|TAN ETF Holdings||%||KWT ETF Holdings||%|
|SUNEDISON INC||10.52%||Sunedison Inc||10.22%|
|SOLARCITY CORP||7.08%||Solarcity Corp||7.86%|
|FIRST SOLAR, INC.||6.58%||Gcl-Poly Energy Holdings Ltd||6.34%|
|GCL-POLY ENERGY HOLDINGS LTD||6.28%||First Solar Inc||6.28%|
|HANERGY THIN FILM POWER GROU||6.00%||Terraform Power Inc||6.11%|
|XINYI SOLAR HOLDINGS LTD||5.24%||Shunfeng Photovoltaic International Ltd||5.28%|
|SUNPOWER CORP||4.75%||Trina Solar Ltd||4.91%|
|TERRAFORM POWER INC – A||4.54%||Sunpower Corp||4.83%|
|CANADIAN SOLAR INC||4.37%||Canadian Solar Inc||4.59%|
|TRINA SOLAR LTD-SPON ADR||4.28%||Hanergy Solar Group Ltd||4.55%|
Aside from the major positions there is limited commonality between the funds. Hence each ETF can be considered to have exposure to different aspects of the sector. The overall macro environment in the solar sector would dictate the trend. However the differences in individual stock exposure means that the return profile of these funds can vary.
Solar ETF Holdings
|Number||TAN ETF Holdings||KWT ETF Holdings|
|1||SUNEDISON INC||Sunedison Inc|
|2||SOLARCITY CORP||Solarcity Corp|
|3||FIRST SOLAR, INC.||Gcl-Poly Energy Holdings Ltd|
|4||GCL-POLY ENERGY HOLDINGS LTD||First Solar Inc|
|5||HANERGY THIN FILM POWER GROU||Terraform Power Inc|
|6||XINYI SOLAR HOLDINGS LTD||Shunfeng Photovoltaic International Ltd|
|7||SUNPOWER CORP||Trina Solar Ltd|
|8||TERRAFORM POWER INC – A||Sunpower Corp|
|9||CANADIAN SOLAR INC||Canadian Solar Inc|
|10||TRINA SOLAR LTD-SPON ADR||Hanergy Solar Group Ltd|
|11||MEYER BURGER TECHNOLOGY AG||Xinyi Solar Holdings Ltd|
|12||SHUNFENG INTERNATIONAL CLEAN||Goldpoly New Energy Holdings Ltd|
|13||ABENGOA YIELD PLC||Sino-American Silicon Products Inc|
|14||JINKOSOLAR HOLDING CO-ADR||Advanced Energy Industries Inc|
|15||ADVANCED ENERGY INDUSTRIES||China Singyes Solar Technologies Holdin|
|16||VIVINT SOLAR INC||Jinkosolar Holding Co Ltd|
|17||CHINA SINGYES SOLAR TECH||Meyer Burger Technology Ag|
|18||SMA SOLAR TECHNOLOGY AG||Giga Solar Materials Corp|
|19||JA SOLAR HOLDINGS CO LTD-ADR||Neo Solar Power Corp|
|20||REC SILICON ASA||Ja Solar Holdings Co Ltd|
|21||HANWHA Q CELLS CO LTD||Motech Industries Inc|
|22||COMTEC SOLAR SYSTEMS GROUP||Sma Solar Technology Ag|
|23||ENPHASE ENERGY INC||Renewable Energy Corp Asa|
|24||DAQO NEW ENERGY CORP-ADR||Gintech Energy Corp|
|25||RENESOLA LTD-ADR||E-Ton Solar Tech Co Ltd|
|26||YINGLI GREEN ENERGY HOLD-ADR||Solartech Energy Corp|
|27||5N PLUS INC||Yingli Green Energy Holding Co Ltd|
|28||Green Energy Technology Inc|
|29||Danen Technology Corp|
|31||Woongjin Energy Co Ltd|
Given the fact above. TAN is the preferred Solar ETF we recommend for those that want to ride the boom in Solar energy. Just buckle up because it will be bumpy.