In what has been an ongoing surprise this year, the Guggenheim Solar ETF (NYSE: TAN) is up 11.5 percent in the fourth quarter, stretching its year-to-date gain to 50 percent. That makes TAN, the bellwether solar exchange traded fund, one of 2017's best-performing non-leveraged ETFs.
What 2018 has in store for TAN and solar stocks remains to be seen, but the ETF's 2017 performance dispels the notion, at least for now, that President Donald Trump would be hazardous to the health of solar equities. TAN, which turns 10 in April, tracks the MAC Global Solar Energy Index. Although TAN is surging this year, bullish factors remain in place.
“Recent bullish factors for solar stocks include [No. 1] a surge in Chinese solar installs in 2017 and broadening solar strength coming from India, Latin America, the Middle East and Southeast Asia,” according to a recent MAC Solar Index note. “[No. 2] stronger demand for solar power due to the increasingly competitive price of solar versus alternatives as countries seek to meet their carbon-reduction targets under the Paris COP21 global climate agreement, and [No. 3] continued low valuation levels that indicate that solar stocks are conservatively priced even after the recent rally.”
China Looms Large
TAN is not a dedicated China ETF, but the world's second-largest economy is a major driver of solar demand, a trend that is likely to continue as China looks to reduce its carbon footprint. Between Hong Kong and Chinese stocks, TAN's China exposure is 34 percent. The U.S. is the ETF's largest geographic exposure at almost 48 percent.
“Forecasts for 2017 global solar installs have risen substantially because of a surge in Chinese installs,” said MAC Solar. “The China PV Industry Association reported that Chinese PV installs in the first half of 2017 were stronger than expected at 24.4 GW, up 19 percent year-on-year. The unexpected strength is mainly coming from distributed solar as opposed to utility solar.”
Last year, China installed 34.5 GW of solar power. Estimates for China installs this year range from 45 GW to 54 GW.
While the U.S. remains outside the Paris climate agreement and market observers remain leery of Trump's potential adverse impact on the solar industry, some argue that TAN and its components are dealing with the possibility of negative politics with aplomb.
“Regarding U.S. politics, the solar market has already absorbed the negative moves that President Trump took earlier this year, including his intention to exit the Paris climate agreement and to rescind the EPA's Clean Power Plan,” according to MAC Solar. “There was relief, however, that the Trump administration did not go so far as to pull the U.S. out of the entire U.N. climate treaty framework nor to rescind the EPA's legal obligation to regulate CO2 emissions.”
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