Market Overview

Why Clouds Could Emerge For The Solar ETF

Why Clouds Could Emerge For The Solar ETF

As has been widely documented, traditional energy stocks and exchange traded funds were drubbed last year. Old guard energy ETFs incurred losses of around 20 percent or more.

Alternative energy ETFs were not immune from that trend. Some performed even more poorly than traditional energy ETFs.

The Invesco Solar ETF (NYSE: TAN) was one such offender. Last year, the largest solar ETF tumbled 25.7 percent. TAN is off to a better start this year, having reclaimed almost all of 2018's losses with a year-to-date gain approaching 23 percent.

While TAN is surging this year, slack growth in residential solar installations is an issue to consider for investors mulling TAN or solar stocks.

“Growth in residential solar panel installations has sputtered in recent years and an eerie parallel from a decade ago — namely elements of the mortgage crisis — may be part of the reason,” said Fitch Ratings.

Why It's Important

TAN follows the MAC Global Solar Energy Index and features exposure to seven countries. That said, the U.S. and China combine for 71 percent of the ETF's geographic exposure and solar stocks from those countries serve as the primary drives of TAN's price action. First Solar Inc. (NASDAQ: FSLR) and SolarEdge Technologies Inc. (NASDAQ: SEDG) combine for 17 percent of TAN's weight.

The pace of solar installations has been slowing for several years.

“Much was made at the time about solar installations breaking record numbers and asserting itself as a much more integral part of energy consumption,” said Fitch. “But following a high-water mark reached in 2016, the pace of solar installations has fallen off. The same holds true for residential installations.”

Over the past three years, TAN is up just 8.2 percent while the S&P 500 is higher by 54.8 percent over the same period.

What's Next

Some states, including California, are using solar subsidies to encourage more adoption of solar power. California goes even further, requiring all new homes built starting in 2020 to have solar power, but there are instances of solar subsidies doing more harm than good and that could hamper installations.

“However, numerous instances of unrealized promises and hardships driven by inaccurate forecasts, asymmetric information or less than ethical sales practices from middlemen are putting the brakes on this rapidly growing sector,” according to Fitch.

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