Exchange traded funds tracking the solar industry have been beaten down for quite some time, as many investors have grown wary of companies in this space becoming profitable. However, some of this bearishness in the solar ETF space may be falling by the wayside, as evidenced by recent trading activity in the industry.
The Market Vectors Solar Energy ETF (NYSEARCA:KWT) was up 12.87% while the other ETF tracking the space, the Guggenheim Solar ETF (NYEARCA:TAN), performed even better, rising 14.6% in the last trading session (Solar ETF Rally Continues).
It is not just the solar ETFs which had a great day yesterday though, as investors saw an amazing session out of one of the key players in the segment. First Solar, Inc. (NASDAQ:FSLR), on news of a business model change, added over 45.53%, jumpstarting solar ETFs and the industry at large.
In addition to a shift in focus, strength in First Solar prices was due to the company unveiling solid 2013 guidance. The company expects full-year earnings between $4.00 and $4.50 a share on sales of between $3.8 billion and $4 billion. The guidance came in better than expectations and led to the huge rally in prices.
This represents a huge shift for First Solar, as the previous quarters were quite unfavorable for the company. These woes were mostly attributable to the declining prices and a global oversupply of solar panels. However, a recent surge in demand for solar power plants helped the company get back on track (Finally Some Good News for Solar ETFs?).
As for the ETFs, KWT manages an asset base of $11.7 million which it invests in a portfolio of 34 stocks. First Solar holds the top position in the ETF with a share of 9.34%. The fund charges a fee of 66 basis points on an annual basis.
On the other hand, TAN has a larger asset base of $63.9 million with 27 holdings. First Solar gets the first preference, dominating the performance of the fund. In fact, the stock accounts for nearly 19% of the total assets, driving the total return.
A Look at the Solar Sector
The solar industry is evolving rapidly with China leading the way. 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 were alleged of selling 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 (The Right and Wrong Ways to Invest In China ETFs).
This good news from China solar industry is also benefitting the solar ETFs. The country seeks to double its upper limit capacity for solar power to 40 gigawatts by 2015.
Obviously, this will again boost the firms in the space, as China accounts for a healthy asset base in both the funds. In fact, KWT has 10.4% in direct exposure to China while TAN has assigned 29.69%.
Moreover, it appears that expansion into emerging solar-power markets, especially those with surging energy demand or high liquid fuel prices, is benefitting the solar companies and assisting them to recover losses incurred in the past two years.
Solar ETFs had been terrible performers in the past and it is only this year that impressive strength has been noticed in the space. The sector could reemerge as a bigger player in the years ahead, but risk will remain the name of the game in solar ETFs going forward.
A strong stomach will definitely be necessary for investment in solar power, but if the sector continues to play on their strength, then it may be able to set off the losses suffered in the past two years and finally become solid stock performers.