Solar ETF Rally May Only Be The Beginning

| About: VanEck Vectors (KWT)

An ETF investing in solar energy companies (NYSEARCA:TAN) has soared 90% in 2013 after a multiyear downdraft. There are several reasons why the solar ETF's rally could be in the early innings with plenty of room to run.

The U.S. is increasing solar panel installations, supporting the fledgling photovoltaic industry, along with related exchange traded funds, as we try to wean ourselves off fossil fuels.

Americans are installing one solar photovoltaic system every four minutes, and given current market growth projections, we could be installing one system every minute and twenty seconds by 2016, reports Stephen Lacy for Greentech Media. In comparison, systems were being stalled every 80 minutes in 2006.

GTM Research calculates that about two-thirds of all distributed solar in the U.S. was installed in the past two and half years, and cumulative installations of distributed photovoltaic systems will double by 2016.

With installations going up every 83 seconds, capacity is projected to hit 9 gigawatts by 2016.

Source: Shayle Kann, GTM Research

Source: Shayle Kann, GTM Research

Deutsche Bank's Vishal Shah, Jerimiah Booream-Phelps and Susie Min are even more optimistic, projecting U.S. solar capacity could hit 50 gigawatts by 2016, reports Rob Wile for Business Insider. However, this would only make up 2% of overall U.S. electricity capacity.

Deutsche Bank attributes the solar industry boom to a number of factors, such as lower costs and increasing competitiveness to traditional retail electricity.

"Considering the improved economics of solar in these markets along with other growth enablers such as solar leasing, availability of low cost financing, we expect installed capacity growth of ~600% over the next 4 years," Deutsche Bank analysts said.

Renewable companies are being structured as "C" corporations that act as holding companies, similar to real estate investment trusts and master limited partnerships, which enjoy certain tax breaks.

"If investors value MLP and REIT assets at 7% to 8% distributable cashflow yield, there is good reason to believe they will value renewable assets at similar, if not lower, yields," Deutsche Bank said.

The solar investment tax credit will expire in 2016, so many are installing now while they can take advantage of the incentive program. Additionally, solar leasing, which allows residents to install solar systems for free and pay nothing for maintenance, is on the rise.

Investors can play the solar industry with some ETF options, including the Guggenheim Solar ETF (TAN), which is up 92% year-to-date, and the Market Vectors Solar Energy ETF (NYSEARCA:KWT), which is up 59%.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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