Solar ETFs Giving Good Returns With Positive News On Solar Tax Credits

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Includes: KWT, TAN
by: Sneha Shah

Summary

With the U.S. government taking a positive stance toward solar energy, solar ETFs provide a good low risky way to gain exposure to the sector.

60% of the top ten holdings of solar ETFs TAN and KWT have given positive returns.

Solar installations are expected to increase by more than 50% by 2020 in the current scenario, as compared to a non-ITC extension scenario.

The two prominent solar ETFs, the Guggenheim Solar ETF (NYSEARCA:TAN) and the Market Vectors Solar Energy ETF (NYSEARCA:KWT), saw a surge in their prices over the last months, despite the general decline in the overall energy sector. Most of it can be attributed to the extension of investment tax credit - ITC proposed by the U.S. government. I have been bullish on these ETFs not only because they guard from the volatility associated with individual stocks, but also since they have adapted to demanding situations by reducing exposure in the Chinese solar companies (when China was facing a downturn) and also removing Hanergy (OTC:HNGSF) from their respective portfolios. The stocks are showing an uptick in the prices now, favored by the increased demand visibility for solar companies over the medium-to-long term.

The top holdings in their portfolio have given good returns

The extension of the investment tax credit of 30% from 2016 end to 2019 end was a huge lottery win for all major renewable energy players. Most solar companies have seen their prices soar as a result of this announcement. Some of them form a major portion of these ETFs' portfolios.

Top Holdings

TAN % of holding as on 8th Jan'16f

KWT % of holding as on 31st Dec'15

1 year return

3-Month returns

First Solar. Inc. (NASDAQ:FSLR)

10.04

8.06

48.46

28.16

SolarCity Corp. (SCTY)

7.12

10.23

-1.63

-0.27

SunPower Corp. (NASDAQ:SPWR)

6.02

7.02

1.92

4.04

Xinyi Solar Holdings LTD.

5.96

5.84

Canadian Solar Inc. (NASDAQ:CSIQ)

5.8

5.51

2.62

11.27

GCL-Poly Energy Holdings LTD (OTCPK:GCPEF)

5.26

4.74

-41.78

-35.06

Trina Solar LTD. (NYSE:TSL)

5.14

-

23.41

5.13

SMA Solar Technology (OTCPK:SMTGF)

4.71

5.17

198.91

27.14

JinkoSolar (NYSE:JKS)

4.3

-

17.58

-15.75

SunEdison (SUNE)

4.05

5.2

-82.44

-63.14

Sino-American Silicon Products Inc

-

4.18

TerraForm Power (NASDAQ:TERP)

-

4.4

-64.64

-46.9

Data collated from Guggenheim Investments, Van Eck and Google Finance

As can be seen from the table above, most of the top holdings have given decent returns. However, the returns have fallen down when compared to the last month and hence investing through solar ETFs make more sense in this industry. The stocks are witnessing a bullish trend following the renewal of the investment tax credit. Though these companies had earlier expressed that they would manage even if the credit was not extended, there is more reason to cheer due to ITC extension.

Good Returns

The YTD (Jan 2016) performance has not been impressive, with both TAN and KWT down by ~11% and 8% respectively. However, the stock performance improved in the recent quarter after the ITC extension led to solar stocks soaring high, and both TAN and KWT returned 8% and 12% respectively for the last 3-months period.

The solar stocks were not performing well in the past due to depressed oil and natural gas prices and an uncertainty regarding the ITC extension. With oil prices not expected to increase in the near time, the ITC extension has provided respite to investors. With the solar industry poised to grow in double digits, there will be ample opportunities for solar companies to shine. I thus remain hopeful of this energy sub sector, and ETFs provide a less risky and diversified way to stay invested here.

Source: Google Finance

Risks

The solar industry as a whole is a very volatile and a peculiar one. While the industry is cheering the ITC extension, there are some concerns for individual companies. Trina Solar has received a buyout offer from the management at a throwaway price, which wasn't welcomed by the shareholders. SunEdison stock has been battered following investor concerns that the company might not be in a position to honor its debts. GCL-Poly which is the world's largest polysilicon player has seen its stock price stagnate because of falling ASPs. This coupled with a constant fear of technology redundancy is always associated with solar industry. All these factors make an investor wary of investing in the risky solar sector; however, high gains are associated with high risks. Given the growth prospects, solar sector looks like a good one to invest in.

Conclusion

In my view, investing through ETF makes more sense if a person is not well acquainted with the industry. With the Paris summit, the countries have put renewable energy at the top of their agenda. The conference also announced the formation of International Solar Alliance to help the developing countries in meeting their solar commitments. This, followed by an ITC extension, has infused new life into the solar sector. With the extension of ITC, the solar installations are poised to see a growth of 54% till 2020 as compared to the scenario of no ITC extension. The U.S. market is predicted to become a 20 GW one by 2020, according to GTM Research. It is a good time to stay invested in this sector, as it is poised to witness huge growth. The major beneficiary will be large global solar companies, which have a significant percentage weightage in these ETFs' portfolios. I think it is a good way to stay invested in the solar sector, especially for those who do not follow the individual stocks closely.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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