TAN ETF's Outlook Dims as Solar Loses Luster

Clouds are growing darker over solar-energy investments, with the $1.4 billion Invesco Solar ETF (TAN) standing in as posterchild for the challenges facing the category. 

The exchange-traded fund, which tracks an index of global solar energy companies, dropped 7% in mid-day trading Friday after solar equipment maker SolarEdge Technologies Inc. reported that cancelled and deferred work would result in sales and operating income missing previous forecasts. TAN has plummeted 34% this year compared with a 14% gain in the S&P 500 as measured by the SPDR S&P 500 ETF Trust (SPY). 

Investors have pulled $292 million from TAN so far this year. The solar energy category has been on a downward slide since peaking in early 2021, and SolarEdge’s report added to the misery. Rene Reyna, head thematic and specialty product strategist at Invesco, said the decline of TAN reflects the imbalances across the solar industry supply chain, which is experiencing uncharacteristically low consumer demand for this time of year. 

“It’s been challenging space, and the macro backdrop is what’s causing some of the issues today,” he said. “Supply is exceeding demand, and we’re seeing more pressure, and that’s what’s driving the market today.” 

TAN, which gained 66.5% in 2019 and 234% in 2020, suffered declines of 25.1% in 2021 and 5.2% in 2022. 

SolarEdge’s stock price has declined by more than 70% so far this year.

And Reyna doesn’t see a near-term turnaround for the category, which helps explain the nearly $300 million worth of net outflows from the ETF since the start of the year. 

TAN ETF: Sunnier Days Ahead for Solar? 

“The good news is, prices are coming down,” he said of the cost of solar energy products and installations. 

“The pressure we’re seeing does make sense, but it’s all getting priced in,” Reyna said, suggesting a longer-term opportunity. 

“As a secular, longer term trend, it seems the world has crossed the tipping point on solar power,” he said. “Solar power is set to dominate electricity in the next few decades.” 

Burned by Thematic Strategies 

Financial advisors describe the struggles of the solar energy category as an example of the risk of investing in thematic strategies.

“Overall, this is just another reason why investing in sectors can be so risky, and we do very little of it,” said Tim Holsworth, president of AHP Financial. 

Chuck Failla, president of Sovereign Financial Group, also believes thematic strategies are “too narrow” for most investors. 

“We don’t really get involved in that thematic type stuff for the same reason we don’t do individual stocks,” he said. “We’re sure we can’t pick a stock that will outperform the broad market, and we’re pretty sure we can’t pick a sector that will outperform the broad market.” 

On the other hand, Vance Barse, founder of Your Dedicated Fiduciary, is a fan of certain thematic strategies as long as he is well versed in the underlying holdings. 

“Before you jump in, there’s an additional level of due diligence that needs to be conducted because you need to understand the underlying constituents and how they perform,” he said.

Regarding solar energy, Barse said that is a topic that comes up frequently with his younger clients. 

“As clean and green energy becomes more prevalent, thematic ETFs have the potential to benefit because of growing demand,” he said. “But, before we jump in, we have to understand what idiosyncratic risks might exist.” 

Contact Jeff Benjamin at [email protected] and find him on X at @BenJiWriter.