Investors are gradually becoming enamored with ETFs and the expediency that they offer over their primary rivals (actively-managed mutual funds). Hence, the continuous inflow of funds into these investment vehicles has been of little surprise. Domestic and international growth of ETFs, despite the global recession, has not been hindered. By some accounts ETFs account for more than a quarter of all equity trading dollar volume – a strong indicator of an increasingly central role that ETFs are beginning to take on.
Historically, business investment into green energy has been very costly and arduous to set up, resulting in very few opportunities for investment via financial securities. With global warming said to be exacerbated by a number of countries whose various lifestyles and production methods persist in carbon emissions, the conditions are ripe for ETFs that cater to green energy. There are a number of possible alternative energy solutions currently under development, with none of them having been proven to be financially viable options. But the Obama administration seems committed to following through on campaign promises to develop clean fuel sources. One of the most hyped and exciting possibilities is solar energy.
Innovation in the industry has led to the creation of an assortment of funds offering investors a different inlet into the solar energy market:
- Claymore/MAC Global Solar Energy Index ETF (TAN): The index is comprised of a number of companies in various business segments in the solar energy industry ranging from raw material distribution to sales and services tangential to solar energy. The top three fund country weightings as of the end of June 2009 were China (30%), U.S. (30%) and Germany (27%).
- Van Eck Market Vectors Solar Energy Index ETF(KWT): Provides exposure to global publically traded companies that obtain at least 66% of revenues (90% on a weighted basis) from solar power and related products and services.
Solar energy ETFs have been very popular investment choices in 2009. According to data from NSX, KWT had net cash inflows through June of $9 million, while TAN had attracted $75 million. But solar energy ETFs are, of course, not without their risks. A quick look at some of the reasons why solar energy ETFs may be due for big gains, along with a few of the risks they face:
Benefits
- Strong global demand for solar energy
- Undeniable trends towards clean energy sources: Climate change initiatives took center stage at July’s G8 Summit held in Italy
- Technological advances in recent years are promising, including automation of once labor-intensive tasks
- Despite the market turmoil, venture capitalists are eager to invest in all forms of alternative energy, including solar energy
- A number of corporate tax benefits have been put in place as incentive for solar energy investment, including a 30% federal tax credit on installed solar thermal systems (through Business Energy Investment Tax Credit)
- Companies that install solar thermal systems on their property benefit from an immediate increase in property value without any effects on the property’s tax assessment
Risks
- Solar energy has not proven to be profitable yet, and there are a lot of other “alternative” energy sources that may be easier, cheaper, and more efficient (such as natural gas)
- Solar energy has been a “pipe dream” for decades with relatively little progress towards sustainable technology
- Solar energy ETFs have experienced significant volatility, with shares regularly trade up or down by more than 10% in a day
- Falling natural gas prices make setting up green energy production such as solar uneconomical (as evidenced by T. Boone Pickens’ wind farm failure)
- Current market conditions have made access to capital through traditional sources very difficult (although venture capital remains an available option), and solar energy technology requires a tremendous amount of capital expenditures.
There is a lot of potential for huge gains domestically as well as abroad through solar ETFs. But it must be said that one has to have a certain type of risk tolerance in combination with the relevant skills to do adequate homework in order to be successful in this type of market.
Mutale Mubanga contributed to this article.
Disclosure: No positions.
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