The solar energy space is bright and booming. The U.S. installed 10.6 gigawatts (GW) of solar PV capacity in 2018, which is sufficient to power 12.3 million homes in America. This is one aspect of how the United States is attempting to be more “green conscious” and pursue environmental initiatives.
Although we still have areas to improve, the U.S. is in a unique position at the center of an emerging solar energy market. With a rapidly emerging solar market, it is the perfect time to consider solar energy ETFs.
What is a Solar Exchange Traded Fund (ETF)
A Solar Exchange Traded Fund or ETF is an investment fund traded on an exchange, such as the New York Stock Exchange, the Nasdaq, or the CBOE, similar to stocks. Solar ETFs invest in alternative energy.
Purchasing social shares through a solar exchange-traded fund can help minimize some of the risk associated with the volatility of the solar market.
Solar Energy ETFs Versus Oil ETFs
Oil ETFs are regularly in high demand because oil is such a prevalent product in the modern global economy. Nearly every product is in some way impacted by the price of oil, from your gas tank to the energy, transportation, and distribution required to sell a product.
There is an inherent risk involved when investing in oil ETFs. Many fluctuating factors can impact the market, such as supply and demand, international politics, as well as environmental conditions. However, with the current rise in oil prices, the oil ETFs in your portfolio are thrilled and likely to turn a handsome profit.
With the increase in gas prices, solar energy has grown in popularity featuring clean energy ETFs. The solar industry has an optimistic outlook because of the falling cost of solar energy when compared to convention gas, coal, and nuclear power. Lazard, an investment bank, identified that solar PV is less expensive than the cost of newly built coal plants, nuclear plants, and gas-peaking plants.
With tax benefits and incentive rebates for going green, consumers are seeking alternative types of energy to save money. As a result, solar energy ETFs may be an attractive addition to your ETF portfolio. With an emerging market, it is an excellent time to “buy-low” while renewable energy is gaining traction.
Investing in oil and alternative energy are not mutually exclusive. Big oil has been investing in alternative energy assets for years. It is advantageous to monitor trends in the solar industry, just like oil companies do.
Trends in Solar
While alternative solar energy has not been as lucrative as environmentally friendly investors would like, there is a growing demand for solar power. As a result, the stocks, as well as the exchange-traded funds that monitor them, have increased.
Solar power demand growth rose 34 percent in 2016 and 31 percent in 2017.
According to the Solar Energy Industries Association (SEIA), “For the third year in a row, the U.S. solar industry installed double-digit gigawatts (GW) of solar photovoltaic (PV) capacity, with 10.6 GW coming online in 2018.”
Additionally, the total installed PV capacity in the U.S. is expected to rise by 14 percent, and solar jobs will increase by 7 percent in 2019.
The decrease in 2018 is primarily due to tariffs that were imposed on solar cells and modules. Because the United States and China represent two of the world’s largest solar panel markets, their new major policy changes significantly impacted the global solar energy market, causing solar stocks to decline.
Nonetheless, according to SEIA, residential solar growth has stabilized, and the market has now seen five consecutive quarters of modest growth. U.S. solar stocks started 2019 on solid footing and are forecasted to make a solid rebound this year.
In April 2019, solar ETFs jumped after Goldman Sachs analyst Brian Lee added First Solar (NasdaqGS: FSLR) to the firm’s Conviction Buy List. A conviction buy is a rare occurrence, where an investor is entirely confident in his analysis of a stock. Lee then raised his price target on the stock from $64 to $75.
Invesco Solar ETF (NYSEARCA: TAN) is comprised of 22 different companies across the solar industry. First Solar (NasdaqGS: FSLR) is the largest component holding in Invesco Solar ETF, accounting for 10.2 percent of the fund’s portfolio. Since the addition to Goldman Sach’s Conviction Buy List, First Solar shares surged 8.0 percent with Invesco Solar ETF advancing 1.4 percent on April 10th.
Lee cited First Solar’s initiative to expand capacity in Malaysia. This potentially could add as much as 23 percent to Goldman Sach’s 2021 EPS or earnings per share.
Top 5 Solar ETFs
Because solar energy stocks are not rising in a straight line, there are factors to consider when investigating solar companies and solar ETFs. Some companies focus exclusively on solar power, while others may be specifically involved in solar panel production or solar cell manufacturing. Be sure to follow the best practices for researching and investing in the solar industry.
Here are our top 5 recommendations of Solar ETFs (in no particular order).
1. Invesco Solar ETF (TAN)
Invesco is the largest and oldest solar specific exchange-traded fund with current assets under management or AUM of approximately $300 million. It is also one of the largest clean energy ETFs on the market.
The Guggenheim Solar ETF was wildly talked about because of its growth and substantial daily trading volume. In 2018, Invesco acquired Guggenheim Investments’ ETF business, which had roughly $38.8 billion in assets, as of February 2018. According to Invesco, this acquisition strengthens Invesco’s ETF abilities and meets “the needs of institutional and retail clients in the US and across the globe.”
Invesco Solar ETF tracks the equity index called the MAC Global Solar Energy Index and offers investment opportunities in the solar energy industry across seven countries. However, its geographical portfolio leans more heavily towards the U.S. and China.
Currently, Invesco Solar ETF is up nearly 34%, making it one of 2019’s best-performing non-leveraged ETFs. It has a total net expense ratio of 0.70% or $70 per $10,000 invested.
2. iShares Global Clean Energy (ICLN)
This ETF is composed of 30 companies that produce energy from renewable sources, including solar. This diversified portfolio spans across nine countries, where the United States, China, and New Zealand account for 70 percent.
Currently, it has an AUM of $204.04 million. Their top holdings include Vestas Wind Systems (VWS), Companhia Energetica Minas Gerais (CIG), and Siemens Gamesa Renewable Energy (SGRE). ICLN also has 2.17 million shares of First Solar Inc. (FSLR).
This ETF tracks the S&P Global Clean Energy Index. ICLN maintains 90% of its assets from this index. The remaining 10% may be in futures, options, and swap contracts. Additionally, it has an expense ratio of 0.47%.
3. First Trust NASDAQ Clean Edge Green Energy Index (QCLN)
QCLN holds a broad portfolio of companies in the clean energy industry. Its portfolio focuses on US-listed firms that fall into four sub-sectors, one of which is renewable electricity generation, such as solar and wind.
According to ETF.com’s QCLN Factset Analytics Insight, QCLN is one of the least expensive and most liquid funds in its market. It tracks a market-cap-weighted index called the First Trust NASDAQ Clean Edge Green Energy Index FUND, which consists of 40 stocks. In other words, while it invests 90% of its assets in stocks from this index, larger companies have a more substantial weighting.
Its top holdings include Tesla Inc (TSLA) and Albemarle Corporation (ALB). A few solar stocks include First Solar, Inc. (FSLR), SolarEdge Technologies, Inc. (SEDG), and Canadian Solar Inc. (CSIQ). QCLN has an expense ratio of 0.60%.
4. Invesco WilderHill Clean Energy ETF (PBW)
Invesco WilderHill Clean Energy ETF focuses on U.S. companies to advance cleaner energy and conservation. 90% of its assets in stocks follow the WilderHill Clean Energy Index, which is a modified equal-weighted index. This ETF has 40 stocks in its basket.
A few solar companies within their top ten holdings include First Solar Inc (FSLR), Canadian Solar Inc (CSIQ.TO), and SunPower Corp (SPWR). Their top 10 holdings account for 31.69% of their total assets. PBW has an expense ratio of 0.70%.
5. VanEck Vectors Global Alternative Energy ETF (GEX)
According to VanEck, this ETF “seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the Ardour Global Index Extra Liquid (AGIXLT).” This ETF focuses on companies involved with alternative energy, including power derived from biofuels, biomass, wind, and solar.
GEX has a total net asset worth of $95.1 million with 31 holdings in their basket. Their solar holdings include First Solar Inc. (FSLR), Canadian Solar Inc (CSIQ), and Jinkosolar Holdings Co Ltd (JKS). Moreover, GEX has a net expense ratio of 0.63%.
While crude oil is frequently talked about and one of the most popular commodities, renewable energy is an emerging market. You’ll likely need an investment strategy to choose the most appropriate ETF. You will also need an investment horizon or an idea of whether this is a long-term or short-term investment.
Furthermore, because ETFs have international implications, every time you add one country to your portfolio, you also inherit political and liquidity risk. Fortunately, solar ETFs are on the rebound and present an incredible long-term opportunity for investors.
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