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Solar ETFs In Focus On Chinese Import Tariffs

Eric Dutram

Although oil prices remain elevated, alternative energy hasn’t exactly seen a renaissance in months past. Instead, it appears that many are abandoning alternative energy tactics for more traditional hydrocarbon sources, looking to add supplies in both oil and natural gas over developing solar and wind power.

However, not all countries have given up on alternative energy as China continues to storm ahead in this sector. While this has been welcomed news for many who are pushing for more alternative energy usage, many do not like how the country has gone about becoming the dominate player in the space (read Oil Bull Market Is No Place For MLP ETF Investors).

In addition to having an undervalued currency—a factor which can help with exports—Chinese solar companies have pretty much unlimited opportunities for financing which has helped them to ramp up supply and bring marginal costs down extremely low.

This has also led to accusations of dumping, whereby Chinese companies sell their products at a loss in order to push the less subsidized American firms out of business. In fact, SolarWorld Industries America estimates dumping margins in excess of 100% while worldwide prices for panels have fallen by about 40% in 2011 alone.

Given the hurt that this has put on the domestic solar manufacturing industry, as well as the fact that this is one of the few exporting industries and it is an election year, many looked for the government to do something in order to at least partially rectify this situation. It appears that in some small way these wishes have been granted as the US Commerce Department announced that it would impose tariffs on solar panels imported from China (read Forget FXI: Try These China ETFs Instead).

However, the tariffs are quite low across the board and are unlikely to have much of an influence on the broad solar market. Duties were below 5% across the board with Trina Solar (TSL) seeing fees of 4.7%, Suntech Power (STP) having to pay 2.9%, and 3.59% for everyone else.

Industry analysts were expecting a tariff for quite some time, but few participants thought it would be this low. Those in the market took this as a great time to buy Chinese-based solar manufacturers as the two aforementioned companies and Yingli Green Energy (YGE) all added at least 7.9% on the day with YGE and STP pushing higher by more than 12%.

Meanwhile, for large U.S. manufactures like SunPower (SPWR) and First Solar (FSLR), the news wasn’t taken very well at all. SPWR fell by over 7% while FSLR tumbled by over 4% as well, suggesting that the tariffs aren’t reason enough for many to be bullish on the U.S. side of the space (read Follow Buffett Into Clean Energy With These Solar ETFs).

However, it should be noted that more tariffs could be coming down the pike for the space and that there is still the dumping issue to resolve. As a result, investors could see Chinese firms drop and American firms rise, assuming that the new rules turn out more favorable than the current plan has.

Impact On Solar ETFs

Unfortunately for those invested in the sector via ETFs, the move wasn’t very positive either. Both products—the Market Vectors Solar Energy ETF (KWT) and the Guggenheim Solar ETF (TAN) -- only added about 1.5% in the session. This was likely due to both funds affording their top two weights to the U.S. and China, a factor that allowed the American firms’ losses to offset the Chinese gains on the day.

Nevertheless, the significant gains in the Chinese solar market on the news were more than enough to outweigh the American slump, reason to push TAN and KWT higher on the day. Nevertheless, both funds are still down significantly over the past one month and one year periods, suggesting that it will take more than a few small subsidies to correct the market (read First Solar Guidance Routs Solar ETFs).

Furthermore, given the muted response from the ETFs, and the roughly equal allocation between Chinese and American firms in these products, this could be a case where an individual security selection approach is needed.  For investors who believe that more tariffs are likely and that a full dumping charge will be levied, U.S. firms could be the big winner. If, however, the status quo reigns or only small slaps on the wrist are taken, Chinese companies could win out and be the better buy.

Either way, however, the broad solar sector will remain risky and solar ETFs will likely have a muted response to the tariff developments. Furthermore, it seems hard to imagine a scenario, at least in the short-term, in which both countries’ solar industries can benefit so investors must make a choice one or another if they want to make a play on the space (read Clean Energy ETFs: Thrive With These Two Broad Funds).

Given the tiny tariffs initially proposed, I am skeptical that the U.S. will take a hard-line stance on such an important trading partner. However, the upcoming election could push more politicians to take a tough on China approach, especially in regions where solar is more popular. Due to this heavy risk and uncertainty—as well as the poor Zacks Rank for many solar stocks-- solar ETFs seem like a weak bet and investors should wait for a brighter future before making a play on this shaky, and politically sensitive industry.

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