Solar ETFs Sink; More Head Winds Seen

In 2013, solar ETFs were the shining star of the ETF industry when it came to performance, more than doubling that year as panel installation became a more common sight in neighborhoods throughout the country.

During the next two years, the ride became much choppier and more volatile for the funds offering exposure to the young but fast-growing industry. The last two years for the two pure-play solar ETFs, the Market Vectors Solar Energy (KWT | F-25) and the Guggenheim Solar (TAN | D-26), have been marked by consistent underperformance, as both political and regulatory head winds have cooled the tax-credit-dependent industry.

As for this year, it appears those head winds appear to be gusting as strongly as ever. On Tuesday after the markets closed, SolarCity reported a larger loss than expected as well as a miss on installment goals. The stock fell today more than 25%, dragging other public solar companies with it.

2016 Proving To Be Tough

SolarCity is the top holding for KWT, with a 10% allocation, and less so with TAN, which holds a 4% allocation. Oddly, TAN was being punished hard this morning, with a 3.3% decline, and KWT is registering a 1.75% loss. But this has just added to the pain the funds have experienced, with KWT down 25% and TAN losing nearly 30% since January 1.

Chart courtesy of StockCharts.com

The forecast for the solar industry could certainly grow stormier. While federal tax credits for solar installation did make it into the 2016 federal budget, it was only after those credits became a negotiating chip. In return for Democrats agreeing to lift the ban on crude oil exports, Republicans agreed to another year of the renewable energy credits that have polarized the two parties.

And with a presidential election year underway, many of the leading Republican candidates have vowed to end the credits if elected president.

Net-Metering Under Attack

The other major issue facing the industry comes from further regulatory action targeting net-metering such as was seen earlier this year in Nevada, and which is being considered in Arizona, California and Wisconsin.

Net-metering has been the carrot on the stick for homeowners, whereby they are able to send extra solar-generated electricity back to grid and only pay for the net electricity they use.

“In effect, the customer is paid the retail rate for the electricity they produce,” Travis Holum, an analyst for Motley Fool, wrote in a recent blog, “Why SolarCity is Leaving One of the Country's Sunniest States.”

“But net metering is under attack in states like California, Arizona and Wisconsin for being too generous to solar installers. For the most part, the solar industry has been able to hold off attacks and keep the policy in place, and that was the hope in Nevada as well,” he wrote.

The potential for a loss of federal tax credits as well as an increased crackdown on net-metering could make future returns of KWT and TAN as challenging or more so than the funds have experienced in the last two years.