Eric Dutram: The global solar industry seems to be rebounding from its hard hit 2012 performance with the resolution of the U.S. fiscal cliff and the uptick in the price of polysilicon – the key raw material in photovoltaic solar panels. Consolidation and specialization are the two keys elements for the development of the industry.
With that being said, solar ETFs could perform better this year, providing investors with solid gains to extend their rally once more. The Guggenheim Solar ETF (NYSEARCA:TAN) was up 13.5% while the other ETF tracking the space, the Market Vectors Solar Energy ETF (NYSEARCA:KWT), performed slightly worse (but still very respectable), adding 11.6% year-to-date.
Though these gains are not enough to make up for the past losses, it is performing better in the energy space like the other alternatives ETFs (read: Solar ETF Rally Continues). While these two funds focus on small cap companies and charge 65 bps in annual fees from investors, they are still different from each other.
TAN tracks the MAC Global Solar Energy Index which offers exposure to companies in some aspects of the solar power industry.
These include companies that produce products for end-users, manufactures of solar panels, and even firms that are engaged in solar power system sales, distribution, installation, integration or financing; and companies that specialize in selling electricity derived from solar power.
The index also includes companies that are not exclusively focused on solar power although it gives these firms a lower weighting than their pure-play peers.
The product holds 27 securities in the basket with heavy weightings dedicated to GCL-Poly Energy Holdings, First Solar (NASDAQ:FSLR) and Memc Electric Materials (NYSE:WFR). From a country perspective, the U.S. makes up about two-fifths of total assets while China and Germany comprise 29.7% and 11.6%, respectively, and give a decent exposure.
Meanwhile, the Market Vectors product tracks the Ardour Solar Energy Index. The benchmark is a rules-based, modified global-capitalization-weighted, float-adjusted index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the solar energy industry.
The Index provides exposure to publicly traded companies from around the world that derive at least 66% of their revenues from solar energy. On a weighted basis, the index constituents derive in excess of 90% of their revenues from solar energy.
The basket includes 263 securities with top weightings going towards GCL-Poly Energy, WFR and FSLR. American securities dominate the portfolio with 35% going to the U.S. while China accounts for 26% of the assets. Taiwan and UK also make up a nice mix with 14% share each in the basket (see more ETFs in the Zacks ETF Center).
Bright Future Ahead
The solar industry is evolving rapidly with China leading the way (read: Finally Some Good News for Solar ETFs?). Previously, Chinese solar companies had unlimited opportunities for financing which helped them to ramp up supply and trim marginal costs to an extremely low level.
This led to accusations of dumping, whereby Chinese companies sell their products at a loss in order to push the less subsidized American firms out of business.
With the decline in the cost of developing solar technologies, this situation seems to be changing as the Chinese government is taking several initiatives to boost growth in the space. The country is currently focusing on untapped domestic markets, which have become one of the world’s biggest areas for solar energy development.
China would be pumping more into the solar space. The nation would be adding another $1.1 billion in subsidies to the space, doubling the government’s investment in the sector. Further, solar companies are now able to obtain cheap long-term financing of up to 100%, without any guarantees, from Beijing.
These efforts would definitely reflate the important Chinese export-focused solar market that has been hit by excess capacity and waning foreign demand (read: Is the China ETF Ready to Soar?).
Beyond this, the Middle East solar industry is also a boon to the global solar power growth as the region intends to boost solar power projects worth about $6.8 billion which are currently underway in the UAE, Kuwait, Oman, Egypt, Jordan and Morocco.
Solar ETFs have still been terrible performers over the long term, even when taking into account the recent strength. Though the broad solar sector remains risky, the space could be a bigger player in the years to come. Investors seeking exposure to the solar power space could tap the current opportunities as the recent rally could (hopefully) be an end point to the bearish trend.