The best-performing ETF of 2019 isn't a tech fund, or a single-country play; it’s a renewable power fund.
So far in 2019, the $344 million Invesco Solar ETF (TAN), a renewable energy ETF that tracks the global solar power industry, has risen a whopping 45.1%. In contrast, the SPDR S&P 500 ETF Trust (SPY) has risen 15.9%.
With natural gas prices on a downward slide and the Trump administration devoted to supporting the domestic fossil fuel industry, the fact that a solar power ETF has outperformed all other ETFs is surprising, to say the least (read: "ETF Of The Week: Solar Fund Shines").
But TAN's outperformance isn't just a quirk of its famously brisk securities lending practice. Other renewable energy ETFs are also posting high year-to-date returns, including the $162 million Invesco WilderHill Clean Energy ETF (PBW); and the $5 million SPDR Kensho Clean Power ETF (XKCP). PBW and XKCP have risen 32.3% and 28.0%, respectively:
Source: StockCharts.com; data as of June 7, 2019
Secret Sauce Is Solar
What unites these three ETFs is an emphasis on solar power. All three ETFs have gotten a substantial performance boost from holdings in Enphase Energy (ENPH) and SolarEdge Technologies Corporation (SEDG), whose stock prices have skyrocketed 266% and 132%, respectively, year to date.
Enphase Energy comprises 7% of TAN, 6% of XKCP and 5% of PBW, while SolarEdge Technologies makes up 9% of TAN, 5% of XKCP and 4% of PBW.
The three ETFs' portfolios share several other high-flying solar stocks as well, listed in the table below.
(You can use our stock finder tool to find an ETF's allocation to a certain stock.)
|Stock Allocations In Clean Power ETFs|
|Stock||YTD Return||TAN Allocation||XKCP Allocation||PBW Allocation|
|Atlantica Yield plc||6.51%||4.00%||1.79%||2.99%|
|Canadian Solar Inc.||35.71%||5.01%||3.07%||3.41%|
|Daqo New Energy Corp. Sponsored ADR||94.36%||4.09%||2.65%||3.89%|
|Enphase Energy, Inc.||266.38%||7.01%||5.88%||5.13%|
|First Solar, Inc.||44.25%||10.37%||4.52%||3.53%|
|JinkoSolar Holding Co., Ltd. Sponsored ADR||59.29%||4.82%||2.68%||3.91%|
|SolarEdge Technologies, Inc.||131.85%||9.32%||4.61%||3.98%|
|TerraForm Power, Inc. Class A||3.28%||4.01%||1.58%||2.59%|
Source: ETF.com; data as of June 17, 2019
Dropped Tariffs Propel Stocks Higher
Despite a rocky second half of 2018, the solar power sector has boomed since the start of the year, rising higher on the back of favorable trade moves.
On Friday, the U.S. Trade Representative announced that bifacial solar modules, or two-sided photovoltaic panels that can catch not just direct sunlight but reflected sunlight, were being removed from the list of U.S.-China tariffs.
This is on top of a list of certain solar panel exclusions announced last September, a move that helped to halt a multimonth slide in the sector.
The tariff exclusions are good news for international solar stocks, as bifacial panels are largely manufactured in China, not the U.S Companies like Canadian Solar and JinkoSolar (JKS), a Chinese manufacturer, popped Friday on the news.
But dropping the tariffs is also good for domestic solar companies. Though U.S. manufacturers like First Solar (FSLR) have struggled for years to compete against a market flooded with cheap Chinese solar panels, the benefit of Trump's solar panel tariffs has proven limited, and the U.S. solar industry lost an estimated 18,000 jobs by the end of 2018.
The tariffs have also hurt domestic solar power installers, retailers and utilities, which compete not against Chinese companies but against the domestic fossil fuel industry. So lower demand from U.S.-based installers and utilities in turn depresses demand for domestic manufacturers' product. Therefore, lifting the tariffs should stoke demand across the solar power supply chain.
Lower Rates, Higher Oil Benefit Future Solar
Two other factors are lifting solar stocks higher.
First, the Fed has given indications it may lower benchmark interest rates this summer, making it cheaper for companies to engage in large capital expenditures. That would reduce the cost for utilities to build out or upgrade existing solar arrays, as well as make it easier for domestic solar manufacturers to expand their production capacity. It also improves how those projects are valued, long term.
Second, oil prices have risen 15% year to date, with additional increases looking likely, as rising U.S.-Iran tensions threaten supply. Historically, as oil prices rise, renewable power options look more attractive in comparison. That appears to be the case here as well.
Should these fundamentals continue to hold, investors in solar-dominated investments could be in for a spectacular 2019.
Contact Lara Crigger at [email protected]