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Inside the Incredible Surge in Solar ETFs

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The solar industry appeared to be doomed in 2012 with ETFs tracking the sector recording double digit losses to the extent of 50%. However, 2013 could have seen a cautious turnaround for the industry.

Investors should note that exchange traded funds tracking the solar industry did their best to provide investors with good gains. These ETFs have not only shed the loss but have come a long way in providing good returns to investors.

Investors should note that The Market Vectors Solar Energy ETF (KWT) is up a whopping 73.82% for the year, while the other solar ETF, Guggenheim Solar ETF (TAN) performed even better recording a massive gain of 108.6% (Key Differences in Solar ETFs: KWT vs. TAN).

Behind the Surge

The growth in the photovoltaic industry appears to be supported by increased solar panel installations. Americans are seen to install one solar photovoltaic system every four minutes, and given current market growth projections, we could be installing one system every minute and twenty seconds by 2016, reports Stephen Lacy for Greentech Media.

GTM Research calculates that about two-thirds of all distributed solar systems in the U.S. were installed in the past two and half years, and cumulative installations of distributed photovoltaic systems will double by 2016. With installations going up every 83 seconds, capacity is projected to hit 9 gigawatts by 2016 (Solar ETF Investing 101).

Additionally, the industry growth is also being supported by lower cost and increased competitiveness.
Moreover, China also seeks to double its upper limit for solar power to 40 gigawatts by 2015 which is again a good development which should boost the solar energy ETFs as China shares a healthy asset base in both the funds. KWT has assigned 23.9% to China while TAN has assigned 27.3%

In a boost for its own solar industry, China’s Ministry of Finance mentioned provision of tax breaks to solar products manufacturers in order to assist those companies that are still short of good demand (5 Clean Energy ETFs Leading the Sector's Surge).

ETFs to Play These Trends

KWT manages an asset base of $18.9 million which it invests in a portfolio of 33 stocks. The fund appears to be highly concentrated in top ten holdings with a share of 60.5%. The top three holdings include GCL-Poly Energy Holdings Ltd, Hanergy Solar Group Ltd and MEMC Electronic Materials Inc.

American securities dominate the portfolio, with 29.2% going to the U.S., while China and Taiwan account for 23.9% and 19.9% of the assets, respectively.

The product is tilted towards the information technology and industrials sectors with nearly 52.9% and 46.8.2% share, respectively.

The ETF is relatively illiquid in nature, trading in a small volume of 2,600 shares a day. Still, KWT is up 73.8% year-to-date and has increased 74.1% over the period of one year (3 Top Performing Energy ETFs in Focus Now).

On the other hand, TAN has a larger asset base of $213.1 million with 29 stocks. Hanergy Solar Group ltd, First Solar Inc and Trina Solar LTD occupy the first three positions in the fund.

The ETF is heavily concentrated in the technology sector, while small and mid cap stocks dominate from a cap perspective. The product trades in a good volume of more than 333,421 shares a day. The fund charges 70 bps in fees and expenses.

TAN has emerged as a top performing non-leveraged ETF after several years of dreadful performance. TAN has not only reached its all-time high but has exceeded it.

Bottom line

Solar energy refers to energy released by the sun which is converted into electricity. Although this energy accounts for a very small portion of the energy market, it has made successful gains in the financial world.

In fact, in years to come, solar ETFs could turn out to be a good alternative energy investment. This is especially true if the current positive trends continue, with both technological innovation and oil prices remaining firm.

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