Falling oil prices and rising gas production are making solar ETFs a terrible investment idea.
The Market Vectors Solar Energy ETF (NYSEArca: KWT) was the worst-performing ETF in the first half of 2012, losing nearly 30 percent of its value, in large measure because oil prices softened so much earlier this year.
That year-to-date red ink was nearly as bad as on another solar-energy fund, the Guggenheim Solar ETF (NYSEArca: TAN), which gave up a bit more than a quarter of its value in the first half. What’s worse, the two ETFs were among the worst-performing ETFs of 2011, begging the question, When will the bleeding end?
Renewable energy investments rise and fall with oil, and the drop in oil prices amid slowing global growth and diminished expectations of demand for everything from energy to goods and services has hit solar ETFs hard. NYMEX crude oil futures have dropped about 12 percent year-to-date to $87.22/barrel as of Thursday’s close. That drop was as much as 20 percent earlier in the year.
In any case, investors who have held KWT in the past year have seen the value of their investment shrink by as much as 77 percent, while TAN’s price has fallen by two-thirds in the past 12 months.
Both funds made it onto a list compiled by our own Matt Hougan earlier this year, in a piece titled “The Five Worst Investments Ever.” Rubberstamping Hougan’s unvarnished view, both TAN and KWT underwent reverse share splits this year as their sponsors sought to pump up their prices.
The appeal of alternative energy sources like solar is also hurt by other newly plentiful supplies of relatively clean-burning energy such as natural gas. Natural gas has become abundant in recent years due to new technologies such as hydraulic fracturing, or “fracking,” Brandon Rakszawski, product manager at Van Eck, told IndexUniverse in a telephone interview.
Dwindling government "subsidies and support" at a time of economic uncertainty have also limited growth in the solar energy segment, he said.
"KWT is in a difficult spot right now, but there is a lot of merit to investing in solar and other alternative energy sources long-term," Rakszawski said. "There's a desire for energy security, to be as energy independent as possible, and that's positive for solar energy."
Constituents Choking Too
A closer look at the performance of some of TAN’s and KWT’s underlying holdings puts an even sharper focus on what the two ETFs are up against.
KWT, for instance, allocates 11 percent of its portfolio to First Solar Inc., an Arizona-based company that has seen its stock drop 55 percent year-to-date and 88 percent in the past year. First Solar is also a large component of TAN, representing nearly 8 percent of that portfolio.
TAN’s top holding is a Hong Kong-listed security, GCL-Poly Energy Holdings, and that company’s stock has dropped more than 22 percent since the end of last year.
Another company in the segment such as GT Advanced Technologies—KWT’s second-largest holding—has given up 28 percent of its share value this year and is now nearly 70 percent cheaper than it was a year ago.
The tale is the same for just about every security in the two funds.