The $2.1 billion Invesco Solar ETF (TAN) is on a performance roll. Again.
The fact is, we've been writing some iteration of this article since 2018 (read: "ETF Of The Week: Solar Fund Shines") because that's how long TAN has been on the rise.
The U.S.' only solar energy ETF began to turn around in November 2018, and—with the exception of a momentary blip during March's market meltdown—has headed skyward ever since:
TAN is the best-performing ETF of 2020 by a very wide margin, rising 144% since January and easily outperforming even the ARK ETFs, which have seen their own dramatic rise this year. (Read: "Best Performing ETFs Of The Year.")
The reason for TAN's strong performance may seem obvious; namely, the hope that a Biden win in next month's presidential election will usher in a golden age of renewable power.
But electoral optimism isn't the whole story. Nor can it explain why TAN was also the best-performing ETF over a three-year time frame, long before election fever started to coalesce; since October 2017, the ETF has risen 50%.
TAN Is Technically A Tech ETF
In fact, there are three main reasons underpinning TAN's rise.
The first is that TAN, more than any other renewable energy ETF, is surfing the tech rally to higher heights. Under the hood, TAN is largely a tech portfolio, with roughly two-thirds of its stocks in the information technology sector:
Source: Invesco; data as of Oct. 14, 2020
Tech has continued to rally, even as other segments of the market have faltered considerably. Consider TAN's top three stocks: SolarEdge (12%), Enphase Energy (10%) and Xinyi Solar Holdings (7%). All three are makers of photovoltaic array equipment—which are classified in the semiconductors sector.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Sec Lending Boosts TAN
But it's not just the rising tech tide carrying TAN's boat higher. Securities lending gives the fund a boost, too.
Many ETFs have securities lending programs, in which the fund managers lend out shares to short-sellers looking to make a quick buck off projected declines in the fund's value.
In exchange, the managers charge a flat securities lending fee, then get to keep whatever income they make on the short-seller's collateral, which is often reinvested during its holding period. (Read: "Is Securities Lending Good For Investors?")
Demand for TAN has been so high among short-sellers that what the fund makes annually from securities lending is roughly twice what it receives in dividend payments from its underlying stocks. That easily offsets the ETF's annual expense ratio of 0.71%, which would otherwise act as a drag on investors' returns.
Solar Energy Tail Winds Lift TAN
Finally, TAN is benefiting from the overall fundamentals of the solar industry, which are robust compared to oil but especially in comparison to other renewable sources of power.
Increasingly, investors can't ignore climate change and the existential risk it poses, and businesses and investors alike are gravitating toward renewable sources of power. Of these, solar energy is one of the most versatile options, as well as the most scalable.
Solar is easy to implement in both commercial and residential settings; it can be deployed in a single PV cell or in an entire farm, often for less upfront cost than building a new windmill or hydroelectric dam. Plus, solar arrays can easily slot into existing energy infrastructure, without requiring additional capital expenditures on the consumer or utilities' part.
In fact, photovoltaic technology has gotten so good that solar is cheaper in many contexts than other sources of renewable power, such as wind or hydroelectric. It's even cheaper than fossil fuels: In a report released earlier this week, the International Energy Agency (IEA) found that solar photovoltaics were cheaper to implement than coal- and natural-gas-fired plants, in most nations.
This, the IEA predicts, will give renewable sources of energy—led by solar—a whopping 80% of the worldwide energy market in just 10 years.
Solar will become “the new king of the world’s electricity markets,” said Fatih Birol, the IEA's executive director, in a statement accompanying the report.
TAN Vs. ICLN
Investors are cottoning on to TAN's bright future. The ETF has witnessed robust inflows year to date, taking in $662 million in new net cash.
That's not quite the $7.5 billion taken in by the largest ESG ETF, the iShares ESG Aware MSCI USA ETF (ESGU), but it's enough to make TAN by far the most popular thematic ESG ETF in the U.S.
Interestingly, another popular renewable power ETF, the $2.1 billion iShares Global Clean Energy ETF (ICLN) has also seen strong inflows, taking in $980 million year to date.
ICLN, which tracks a more diversified portfolio of renewable energy stocks, has a hefty weighting to solar energy companies. (To compare any two ETFs, please visit our ETF Comparison Tool.)
According to ETF Action's overlap screener, ICLN and TAN share 15 companies in common—or more than 50%, considering how narrow each portfolio is (TAN holds 26 companies and ICLN holds 30).
No wonder then that ICLN is up 81% year to date.
Contact Lara Crigger at [email protected]