For The Patient Investor, Future Looks Bright For Solar ETFs

Often times, it can be difficult to piece together a rosy assessment of a faltering asset class or sector, particularly a notoriously volatile group such as solar equities and the corresponding exchange traded funds.

No one is going to refute the Guggenheim Solar ETF TAN's three-month decline of 29.1 percent. That is good for one bear market and nearly half of another using the definition of a 20 percent decline representing a new bear market. Weakness in Chinese stocks and tumbling oil prices have been among the factors plaguing solar stocks and TAN, the largest dedicated solar ETF.

“Solar stocks fell in the past three months due to (1) the sharp downward correction in the Chinese stock market, which caused some carry-over weakness in Chinese-headquartered solar stocks, (2) concern that slower economic growth in China may translate into reduced  solar power growth in China, (3) increased talk about a  Fed rate hike in 2015 as higher interest rates could cause some downward pressure on yieldcos, (4) renewed weakness in crude oil prices after world powers reached a nuclear agreement with Iran that could pave the way for a sharp increase in Iranian oil exports late this year when sanctions are due to be dropped, and (5) continued solar trade disputes,” according to new research from MAC Solar Index, the index provider for TAN's underlying index.

Related Link: U.S. ETFs Are Adding Assets At Breakneck Speed

With a weight of 38.3 percent, China is TAN's second-largest geographic weight behind the nearly 42 percent the ETF allocates to the US. Logically speaking, TAN is not an ETF that will be immune to shocks in Chinese stocks.

Earlier this month, Benzinga reported that among Chinese companies trading in the US, JinkoSolar Holdings JKS, Trina Solar Ltd. LTD and JA Solar Holdings JASO are the second-, third- and fourth-most heavily shorted. 

Good News For The Patient Solar Investor

“Solar will boom over the next 25 years and will account for 35% (3.429 GW) of all electricity capacity additions through 2040, according to Bloomberg New Energy Finance’s 'New Energy Outlook 2015.' Spending on new solar installs will be a massive $3.7 trillion through 2040, according to the BNEF report,” notes Mac Solar Index.

Currently, fossil fuels account for two-thirds of consumed power around the world, but the BNEF report projects that figure will slide to 40 percent by 2040 with zero-emission energy sources accounting for 56 percent of the world’s power-generating capacity.

The community solar concept is also expected to take off, potentially benefiting companies such as Elon Musk's SolarCity Corp. SCTY. SolarCity is TAN's second-largest holding at a weight of 6.7 percent.

“Meanwhile, the U.S. National Renewable Energy Laboratory (NREL) recently released a major report on community solar, laying out forecasts, policy prescriptions, and analysis of ownership structures,” according to MAC Solar Index. “NREL is highly bullish on community solar, saying that 'shared solar' could add 5.5-11 GW to the U.S. rooftop market by 2020, representing $8.2-$16.3 billion of solar sales.  NREL says that community solar could account for 32-49% of the U.S. distributed solar PV market by 2020.”

Investors have added nearly $3.1 million to TAN this year. The ETF has $293.2 million in assets under management.