4 Reasons to Short Solar ETFs

by: Kevin_Grewal

The solar energy sector continues to witness whipsaw action and downward price pressure throughout the industry is likely to prevail in the near-term as supply and demand imbalances continue to widen.

Fundamentally speaking, the sector has numerous headwinds and continues to remain weak. As a whole, the sector has been plagued by falling prices, inventory buildups and extension of credit terms. In fact, Stephen Simko of Morningstar suggests that the industry will likely bottom out in the coming months despite witnessing increased global installation activity due to lackluster demand, which will make it very difficult to reduce inventory levels and keep factories running at high utilization rates.

As for global demand, Simko suggests that aggregate demand needs to be at a minimum of 23 GW in order to support the current pricing levels of $1.40 to $1.50 per watt of solar module and forecasts are pegging demand for this year to reach about 18.3 GW, resulting in margin compression throughout the industry for the remainder of the year.

Further constraints and negative impacts in the industry are expected to dwell as companies write down inventory and low cost global manufacturers are forced to reduce production levels and incur negative operating leverage.

At the end of the day, the solar industry has an uphill battle to fight and will likely continue to see negative price support in the near-term future; however, as industry fundamentals improve bringing supply and demand back toward equilibrium, the sector could have a promising long-term outlook.

Some ETFs impacted by the solar industry include:

  • Guggenheim Solar (NYSEARCA:TAN), which includes companies that derive a significant portion of their revenues from the solar energy sector.
  • Market Vectors Solar Energy ETF (NYSEARCA:KWT)
  • iShares S&P Global Clean Energy Index (NASDAQ:ICLN), which allocates a significant portion of its holdings to solar energy companies such as First Solar (NASDAQ:FSLR), GT Solar International (SOLR) and Trina Solar LTD. (NYSE:TSL).
  • Market Vectors Glb Alternatve Energy ETF (NYSEARCA:GEX), which boast First Solar as its top holding.

Disclosure: No Positions