Solar ETFs Dip On Hint Of Trade Dispute

July 30, 2014

A tariff on Chinese solar companies is good for U.S. companies, right?

Two solar-focused exchange-traded funds have moved lower after the U.S. Department of Commerce said last Friday it aims to impose tariffs on Chinese and Taiwanese solar companies, accusing those firms of “dumping” solar products in the U.S. at unfairly low prices.

While U.S.-based makers of photovoltaic (PV) panels and semiconductors used in those panels could benefit in an immediate sense from such proposed tariff increases, the market’s reaction seems to be more an indication that any whiff of a trade war between the world’s two-biggest economies is bad news over the longer term.

The tariffs, which must still be confirmed, are likely to add to the tension between the two countries. Earlier this month, former President Bill Clinton reportedly criticized China over its territorial disputes with smaller countries in the South China Sea after China told the U.S. not to meddle in the country’s affairs.

“I don’t think trade wars are good for any industry,” Angelo Zino, an alternative energy analyst at S&P Capital IQ, said in an interview. “China, Japan and the U.S. make up about 60 percent of the total solar installation market globally. Once you start getting political interference in some of these key markets, prices are going to stay inflated here in the U.S. longer than they probably should.”

The Chinese government is allegedly subsidizing chips as well as panels for solar PV, making the panels cheaper in the U.S. and prompting a reaction from the Department of Commerce to make them more expensive by raising tariffs. A final decision on the matter should come by the end of January 2015.

Since last Friday, the Market Vectors Solar Energy ETF (KWT | D-35) has dropped 3.7 percent, while the Guggenheim Solar ETF (TAN | B-43) is down 0.6 percent.

Why the disparity?

TAN lends some of its holdings to other investors who short-sell those stocks, and collects a fee for its securities lending. In an interview with the Wall Street Journal, Dave Nadig, chief investment officer for ETF.com, said that almost since its inception in 2008, “TAN had a portfolio of stocks the Street desperately wanted to short.”

TAN’s securities-lending-related advantage over KWT can also be seen in year-to-date returns: TAN is up almost 17 percent, while KWT is up more than 10 percent.

Both ETFs have outpaced the S&P 500 Index’s 7 percent gain for the year.

Tan_Vs._KWT_YTD_Performance

Chart courtesy of StockCharts.com

Both funds make First Solar and SolarCity two of their top three holdings, and they both have heavy exposure to Chinese solar companies as well.

Zino said the tariff is going to hurt the Chinese companies in terms of their margins but help the U.S. companies such as First Solar because higher prices from Chinese players should support pricing for First Solar.

He added that the new tariffs are a negative in the near term for SolarCity given that the company is using China-based modules for its installations, but noted that, overall, SolarCity is in the process of growing its operations; longer term, the tariff probably doesn’t affect it as much.

 

 

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