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Key Differences in Solar ETFs: KWT vs. TAN

Zacks Equity Research

2013 has been a good year for the alternative energy space, pretty much across the board. This has been especially true for solar companies which have seen their share prices edging up, while firms that use ‘green’ technology like Tesla Motors have been market favorites.
Lately, high oil prices have helped solar stocks to make new highs. Moreover, strong macroeconomic factors have helped this sector rise above others in the energy space. According to the Solar Foundation, U.S. companies that manufacture and install solar equipment account for 119,000 jobs (Read: 3 ETFs to Buy for Obama's Climate Change Plan).
Good news also comes from the world’s second largest economy, China, which has plans to extend its solar output. This has acted as an added stimulus to solar stocks and it could help the country reduce its reliability on exports and will bring down the oversupply glut of photovoltaic panels in the market.
While the outlook looks pretty bright for this sector, the ETFs in the alternate energy space haven’t missed the call either. Investors have piled up on TAN and KWT and the space has outshined its counterparts by double digits.  
Given strong macroeconomic factors and a solid performance by the sector so far, only investors with a strong risk appetite should buy after the big run-up. Still for risk tolerant investors, we have highlighted some of the key differences between the two funds below:
A comparative view of KWT and TAN

Index Exposure: Launched in April 2008, TAN tracks the MAC Global Solar Energy Index, which offers exposure to companies in some aspects of the solar power industry.

These include companies that produce products for end-users, manufacturers of solar panels, and those that are engaged in solar power system sales, distribution, installation, integration or financing. It also includes companies that are not exclusively focused on solar power although it gives these firms a lower weighting than their pure-play peers.

Launched in April 2008, KWT tracks the Ardour Solar Energy Index, which is a rules-based, modified global-capitalization-weighted, float-adjusted index. This intends to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the solar energy industry.

The Index provides exposure to publicly traded companies from around the world that derive at least 66% of their revenues from solar energy. On a weighted basis, the index constituents derive in excess of 90% of their revenues from solar energy (Read: Solar ETF Investing 101).

Holdings: TAN holds 29 securities in its basket. First Solar Inc., GCL POLY Energy Holdings Ltd. and GT Advanced Technologies are its top 3 holdings. The fund is more concentrated in its top 10 holdings, which contribute almost 60% of the assets to the fund.  

KWT holds 33 securities in its basket. MEMC Electronic Materials, First Solar Inc. and GCL-Poly Energy Holdings Ltd. occupy the top 3 spots of the fund. Like TAN, this product is tilted more towards its top 10 holdings, which account for a 58% share.

Sector Exposure: TAN gives more exposure to securities in the Information Technology sector, which take almost an 80% share, while Industrials takes up the rest. Meanwhile, KWT gives 50% exposure to Information Technology, while Industrials takes a 44% share.

Market Cap: TAN gives almost a 50% exposure to micro-cap stocks whereas small-cap and mid-cap take almost an equal share (see all Alternative energy ETFs). KWT gives an almost equal share to micro, mid and small cap stocks.

Country Exposure: Top 5 country exposure for TAN includes the U.S. (42.32%), China (27.25%), Hong Kong (12.58%), Germany (7.53%) and Norway (4.43%). For KWT, the top 5 countries include the U.S. (32%), China (20.4%), Taiwan (18.4), U.K. (7%) and Norway (5.3%).

Performance: Both the products have given impressive returns on a year-to-date basis. TAN has given returns of around 68% and a dividend yield of 5.3%, while KWT has generated a return of about 40% and a dividend yield of 2.52%. (Read: Can Solar ETFs Continue Their Bull Run?).

Fees & Expense: Both the funds are a bit expensive in the space. TAN charges investors a hefty 70bps in fees, while KWT is a tad cheaper charging 66bps in fees.

AUM & Average Daily Volume: TAN has amassed $167 million in assets so far and has an average trading volume of around 216,000 shares a day whereas KWT is low in AUM with assets of only $15.3 million and is relatively illiquid in nature trading in a small volume of only 4,800 shares a day.

Bottom Line

Solar ETFs have still been terrible performers over the long term, even when taking into account the recent strength. Though the broad solar sector remains risky, the space could be a bigger player in the years to come.

Investors seeking exposure to the solar power space could tap the current opportunities as the recent rally could (hopefully) be an end point to the bearish trend.  Just remember some of the key points outlined above when you are deciding between the two solar ETF options currently in the market.

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