Is China Sending Solar ETFs To A Blackout?

by on August 28, 2009 | ETFs Mentioned:

President Obama is determined to establish the U.S. as “the world’s leading exporter of renewable energy,” but it seems that he may face some stiff competition from a familiar source. According to a recent article in the New York Times, China has established itself as the early leader in the race to become the dominant producer of green energy alternatives, a significant obstacle to U.S.-based firms hoping to capitalize on increased focus on the development of alternative energy sources.

China has An Early Advantage In The Solar Energy RaceChina has already made significant progress in developing sustainable solar energy sources, and seems hell bent on keeping a leg up on the rest of the world. In the last year, Chinese companies have helped to push down the price of solar panels by nearly 50%, and there are reports that they are currently selling panels on the American market at less than cost in an attempt to build market share and put pressure on potential competitors.

The Obama administration has pledged to support the development of clean energy initiatives in the U.S., offering various tax incentives to equipment manufacturers. But the assistance provided by the U.S. will likely pale in comparison to the perks being offered by the Chinese government to companies there. According to the Times:

Since March, Chinese governments at the national, provincial and even local level have been competing with one another to offer solar companies ever more generous subsidies, including free land, and cash for research and development. State-owned banks are flooding the industry with loans at considerably lower interest rates than available in Europe or the United States.

Despite major breakthroughs in technology, solar energy is still significantly more expensive to generate than energy from traditional sources (such as coal and oil) and even many alternative sources (such as wind). And the hurdles remaining before solar power could be widely used around the globe will be difficult to overcome.

One major hurdle for Chinese solar energy equipment manufacturer: the U.S. stimulus plan requires that any construction project receiving government funds must buy materials, including solar panels, from countries that have signed the WTO’s agreement on free trade in government procurement. To skirt this restriction, Chinese companies are expected to begin building solar energy plants in the U.S. within the next 12 months.

Despite the commitments of the current administration, catching China in the solar energy industry is a daunting task. Fueled by cheap labor and generous government support, it seems very plausible that U.S. companies will become consumers of solar products, not producers. The “green economy” that we’ve been promised is putting down some pretty strong roots halfway around the world.

ETF Plays On Solar Energy

Solar energy has still not been proven as a viable and sustainable technology. And there will likely be many more twists in this story in coming months and years as U.S. and German companies continue to forge ahead with plans to develop efficient solar energy products. Fortunately for ETF investors, there are two exchange-traded products currently on the market that offer exposure to global solar energy benchmarks, including significant allocations to both Chinese and U.S. firms:

  • Market Vectors Solar Energy ETF (KWT): The U.S. (35%), China (28%), and Germany (27%) account for the vast majority of KWT’s holdings. KWT has lost nearly two-thirds of its value over the last year, but has shown strong gains in recent months. This ETF has an expense ratio of 0.65%.

KWT

  • Claymore/MAC Global Solar Energy ETF (TAN): For those investors bullish on the solar energy sector but concerned that China will outpace the U.S. in the race to become the world’s dominant green energy player, TAN may also be an appealing ETF play. This fund (which Claymore president Christian Magoon recently discussed with ETF Database) is the first ETF to focus on the global solar energy. Similar to KWT, TAN’s holdings are concentrated in China (30%), the U.S. (30%), and Germany (27%). TAN has a similar one-year performance (-67%) and expense ratio (0.65%) as the Market Vectors fund.

TAN

Disclosure: No positions at time of writing.