Broadly speaking, solar stocks and the corresponding exchange-traded funds (ETFs) performed well in the first quarter. The MAC Global Solar Energy Index, a widely followed gauge of solar equities, gained almost 25% in the first three months of 2019.
One of the reasons why solar ETFs are among this year’s best-performing funds is that oil prices are high. While solar ETFs and equities are still relatively new in terms of financial market age, the group has shown a correlation to oil prices, rising in unison with crude and falling when oil prices do the same. The thesis here is that high fossil fuels prices should be a demand driver for renewable energy.
More compelling fundamental factors augur well for solar ETFs and equities.
“Global solar demand should grow 12% this year and 10% in 2020, according to Goldman Sachs. Growth should be especially strong in Europe, where demand could surge 30% this year. And the Middle East, where solar adoption has been slow to pick up, could double its capacity this year,” according to Barron’s.
Here are some solar ETFs for environmentally-conscious investors to consider.
Invesco Solar ETF (TAN)
Expense ratio: 0.74% per year, or $74 on a $10,000 investment
Home to nearly $295 million in assets under management, the Invesco Solar ETF (NYSEARCA:TAN) is the largest solar ETF. Fast-approaching its eleventh birthday, TAN is also one of the oldest solar ETFs, making it the bellwether of this group. TAN tracks the aforementioned MAC Global Solar Energy Index.
While TAN performed well in the first quarter, some causes for concern emerged late in the quarter. The solar ETF finished March with a loss of more than 6% and the last week of the month was particularly tough on TAN as the ETF shed about 4%. That does not mean TAN is headed for a bear market, but solar ETFs are volatile and TAN’s recent performance could be a sign investors can wait for better pricing.
Another element to consider with TAN is investors’ appetite for smaller stocks because the average market value of this solar ETF’s components is $1.41 billion, putting the fund in small-cap territory. In fact, barely more than 7% of TAN’s holdings are considered large-caps, but over 62% of the fund’s holdings are classified as growth stocks.
ALPS Clean Energy ETF (ACES)
Expense Ratio: 0.65%
Still a couple months shy of its first anniversary, the ALPS Clean Energy ETF (NYSEARCA:ACES) is one of the newest alternative energy ETFs and the fund provides a refreshed alternative to traditional solar ETFs because, well, ACES is not a dedicated solar ETF.
“The fund’s underlying index has a differentiated approach to investing in the sector. First, by narrowing the list of constituents to companies whose primary operations are focused on clean energy, the fund offers more pure-play exposure to the sector,” according to ALPS.
In plain English, this is what ACES does: the fund provides exposure to seven alternative energy themes, of which solar is one. Like the aforementioned TAN, ACES features light large-cap exposure and is dominated by mid- and small-cap stocks. Solar stocks represent about 14% of the fund’s weight.
VanEck Vectors Global Alternative Energy ETF (GEX)
Expense ratio: 0.63%
In recent years, more investors have embraced the idea of solar investing, but there remains a dearth of dedicated solar ETFs. In lieu of those type of funds, investors should consider quasi-solar ETFs such as ACES and the VanEck Vectors Global Alternative Energy ETF (NYSEARCA:GEX). As its name implies, GEX is a play on multiple clean energy segments.
The fund’s underlying index defines alternative energy as “power derived principally from bio-fuels (such as ethanol), biomass, wind, solar, hydro and geothermal sources, and also includes various technologies that support the production, use and storage of these sources,” according to VanEck.
GEX’s 31 holdings must garner at least half their revenue from alternative energy to be included in the fund’s index. While GEX is not a dedicated solar ETF, it takes some of the edge off of direct solar investments as the fund has been less volatile than TAN over the past three years. That said, TAN has outperformed GEX by an almost 2-to-1 margin over that span.
Invesco WilderHill Clean Energy ETF (PBW)
Expense ratio: 0.70%
Like several of the funds highlighted here, the Invesco WilderHill Clean Energy ETF (NYSEARCA:PBW) is a diversified alternative energy fund, not a focused solar ETF, but PBW’s solar exposure is modestly higher than some of its most direct competitors. The other trait PBW shares with some of the funds mentioned here is that this fund has only modest large-cap exposure.
PBW’s 39 holdings have an average market capitalization of $4.53 billion. Seven of those components are solar companies. Just over 10% of PBW’s holdings are classified as utility stocks and that is relevant because more utilities across the U.S. are bolstering their solar footprints.
“Utilities are ramping up their solar projects because of state initiatives meant to speed up renewable-energy projects and growing interest from corporations, among other reasons,” according to Barron’s.
Global X YieldCo & Renewable Energy Income ETF (YLCO)
Expense ratio: 0.65%
Solar ETFs usually are not fertile ground for dividend investors. The Global X YieldCo & Renewable Energy Income ETF (NASDAQ:YLCO) is the best, if not only way of changing that view. The proof is in YLCO’s pudding. This solar ETF has a trailing 12-month dividend yield of 3.95%, compared to a microscopic 0.52% on TAN.
YLCO holds what are known as YieldCos. Those firms “may include renewable energy utilities (e.g., solar, wind and hydroelectric power), producers of renewable energy components, producers of biofuels, and other companies involved in the financing, installation, and operation of renewable energy projects, including smart grid technology,” according to Global X.
This solar ETF’s holdings hail from more a dozen countries, including both developed and emerging markets. The U.S. and Canada combine for almost a third of the fund’s geographic weight while Denmark and Chile combine for about 22.90%.
YLCO is likely to lag traditional solar ETFs on the upside, but the fund is less volatile, has a higher yield and has recently held steady even as TAN tumbled.
As of this writing, Todd Shriber does not own any of the aforementioned securities.
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