TAN, 2013’s Hottest ETF

September 26, 2013

The solar industry’s stabilization has propelled two solar ETFs’ outperformance.

The stabilization of the solar industry this year created by China’s reduction in solar output and the Obama administration’s renewed support for the alternative energy has powered the performance of the two solar ETFs to dizzying heights.

The positive macroenvironment for the sector has made the $195.6 million Guggenheim Solar ETF (TAN | B-35) the best-performing ETF year-to-date, up a whopping 99.23 percent, according to data compiled by IndexUniverse. The fund has also taken in $83.83 million in fresh assets through Sept. 23.

TAN’s competitor, the $17.9 million Market Vectors Solar Energy (KWT | C-36), is up 65.20 percent year-to-date, which makes it the third-best-performing ETF. The First Trust Nasdaq Clean Edge Green Energy Index Fund ETF (QCLN | B-20), which is heavily overweighted to semiconductors (43 percent), is sandwiched in between the two funds, up 69.73 percent this year.

TAN tracks the MAC Global Solar Energy Index, while KWT tracks the Market Vectors Global Solar Energy Index.

Although TAN is heavily weighted, at 80 percent, to the information-technology (IT) sector, with the balance weighted to industrials, more than half of KWT is exposed to IT, and 46.8 percent to industrials.

Where the two funds differ the most is in their market-cap focus: Almost half of TAN’s exposure is in micro-cap stocks, with the remaining balance toward small-cap and midcap stocks, while KWT is almost equal-weighted in micro-, mid- and small-cap stocks.

In addition, TAN’s country exposure is heavily weighted toward the U.S. (42.32 percent) and then China (27.25 percent), while KWT has less exposure to the U.S. (29 percent) and Chinese companies (23.9 percent).

On the macro front, Chinese authorities have pledged to cut overcapacity in industries such as energy and steel to reduce the economy’s reliance on investments and exports. A global oversupply of solar panels led to a 20 percent plunge in prices last year, according to data compiled by Bloomberg.

Boulder, Colo.-based Navigant Research is also predicting that by the end of the decade, solar-voltaic is expected to be cost competitive with retail electricity prices, without subsidies in a significant portion of the world. Navigant forecasts that annual revenue from solar PV installations will surpass $134 billion in 2020.

While First Solar, a top 10 holding in both funds, posted a 70 percent drop in earnings, it appears that industry's fortunes will be better going forward.

According to IndexUniverse ETF analyst Paul Baiocchi, the stock market seems to be pricing-in better margins and better sales due to White House’s support of alternative energy and the Environmental Protection Agency’s crackdown on emissions from coal-fired power plants.

However, he noted that investors should keep the sector in focus for the short term. “Anytime you’re talking about pockets of the market that are this specific, you’re ultimately making more of a tactical call,” Baiocchi said.

“You should consider getting diversified energy exposure and then overlay that in the short-to-medium term with some sort of renewable energy play, whether it be wind or solar stocks,” he added.


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