Solar ETFs Off To A Not-So-Bright Start

by on January 27, 2010 | ETFs Mentioned:

After surging out of the gates to start the new year, many ETFs have sharply reversed course, now finding themselves in the red for 2010 as January draws to a close. The S&P 500 SPDR (SPY), which was up nearly 3% after the first six trading sessions, is now down almost 2%. The shift in fortunes for more risky assets has been even more severe: the iShares Emerging Markets Index Fund (EEM) has already slipped 9.5% from its 2010 high. But no sector has been hit harder than solar energy, as the risks of relying on government support during tenuous economic times have come to light in recent weeks.

The primary factor driving solar energy ETFs lower in recent weeks comes from Germany, a major hub of solar energy activity and producer of solar panels. Responding to a plan to wean the still nascent industry off of government subsidies, some German lawmakers have begun to push for deeper cuts than initially proposed. Environment Minister Norbert Roettgen announced last week that the government would propose a cut of 15% in addition to reductions already outlined in Germany’s Renewable Energy Act. The one-time cut is set to become effective for roof installations in April and for open field sites in July.

Even after the reductions, the solar power industry in Germany will still receive significant support from government policies. “Rooftop systems already installed before the proposed cut will earn about 39 euro cents (55 cents U.S.) per kilowatt hour from local utilities,” writes Jeremy van Loon. “That compares with approximately 5 cents a kilowatt hour paid to generators using coal, natural gas or nuclear fuel for baseload electricity next year.”

Solar ETFs Could Be A Buying OpportunityIt remains to be seen if Germany’s move will result in a setback for the entire industry or simply spur a reshuffling of operations as solar companies shift their focus to countries more willing to subsidize solar power development. In recent months China has made a push to become a leader in the solar power industry, and Germany’s pullback could further accelerate this trend.

Government subsidies have been a vital source of funding for the global solar energy industry, incentivizing the private sector to work towards the development of an alternative source of energy without taking on excessive risk. The move to reduce government support of the solar power industry in Germany reflects the early success the sector has experienced, but also threatens to stymie growth in an area of the market that is still rapidly developing.

Solar ETF Options

Following the downward correction, many investors now view the solar energy industry as potentially a bargain buy. An investment in a single solar energy stock can be exceedingly risky, making ETFs focusing on this sector an appealing play. Fortunately for investors bullish on the long-term prospects for alternative energy, there are a handful of funds offering exposure, including:

  • PowerShares WilderHill Clean Energy Portfolio (PBW)
  • Market Vectors Global Alternative Energy ETF (GEX)
  • PowerShares Global Clean Energy (PBD)
  • iShares S&P Global Clean Energy Index Fund (ICLN)
  • PowerShares WilderHill Progressive Energy Portfolio (PUW)

There are also two ETFs focusing more specifically on solar power (see a head-to-head breakdown here). For more actionable ETF investment ideas and head-to-head comparisons of ETFs, sign up for out free ETF newsletter.

  • Claymore/MAC Global Solar Energy (TAN): This ETF is based on an index comprised of companies that produce solar power equipment and products for end-users, companies that produce equipment used by solar cell and module producers to manufacture solar power equipment, and companies specializing in the solar cell manufacturing or the provision of consulting services to solar cell and module producers. At nearly 30% Germany accounts for a larger portion of TAN’s holdings than any other country, followed closely by China and the U.S. TAN is down more than 10% so far in 2010.

TAN

  • Market Vectors Solar Energy ETF (KWT): This ETF is based on an index consisting of publicly traded companies from around the world that derive at least 66% of their revenues from solar power and related products and services. On a weighted basis, the companies that make up KWT derive in excess of 90% of their revenues from the solar industry. Relative to TAN, this ETF has a larger allocation to the U.S. (about 35%), but German companies still account for a significant portion of holdings (nearly 25%).

KWT

Disclosure: No positions at time of writing.