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Will Solar ETFs Suffer from Panel Oversupply?

Zacks Equity Research

Oversupply of solar panels was largely responsible for dragging down solar ETFs in recent times. Latest data showed that healthy growth in solar panel production and weakening demand created excess supply in the industry, which negatively impacted panel manufacturers. The producers are now considering different ways to combat the glut.

Dwindling Demand for Solar Panels

Despite positive developments like higher panel installations, a shift to fossil-fuel free energy sources by most countries to protect the environment and the U.S. tax credit extension, solar companies suffered in the first half of this year. Moreover, sluggish demand in the second-largest economy in the world had a negative impact on their performance. While China witnessed 22 gigawatts of installations during the first half of this year, panel installations are speculated to be between 6 and 8 gigawatts in the second half (read: Dark Clouds Over Solar ETFs Post Q2 Earnings?).

The situation is likely to worsen further after the Chinese government opted to reduce subsidies on solar panel installations. The government has cut subsidies for solar farms, which commenced operations after Jun 30. Panel manufacturers speculate that this may have a negative impact on panel demand. While the biggest solar panel manufacturer, Trina Solar Ltd. TSL recently forecast that shipments may fall 6.5% in the ongoing quarter, Yingli Green Energy Holding Co. Ltd. YGE expects shipments to decline 54% during the quarter.

Though recent data showed that demand is increasing, the pace of growth is decelerating. According to Bloomberg New Energy Finance, global solar production facilities will have a capacity of 67 gigawatts by this year, a year-over-year increase of 27%. Capacity is expected to increase 25% in 2017 and 23% in 2018 (read: Top and Flop Sector ETFs YTD).

Supply Continue to Increase

As per New Energy Finance, rising output is expected to boost global capacity by 18% in 2016. Major producers including Canadian Solar Inc. CSIQ, Trina Solar and JinkoSolar Holding Co., Ltd. JKS have raised production levels. While Trina Solar recently raised its production capacity by 7.1%, Canadian Solar – the second largest panel producer – is in a process to launch a 350-megawatt factory in Brazil.

These oversupply concerns led solar panel manufacturers to come up with some measures to combat the same. For instance, Canadian Solar has already said it is changing its expansion plans. The panel maker will expand capacity by only 5.8 gigawatts, instead of the earlier target of 6.4 gigawatts. On its conference call in August, the company’s CEO mentioned plans to “play safe” this year and look toward improving margins instead.

Solar ETFs in Focus

Like the solar companies, ETFs from the space are also feeling the heat of these oversupply concerns. Hence we have highlighted two solar ETFs, which are likely to remain on investors’ radar in the days ahead (see all Alternative Energy ETFs).

Guggenheim Solar ETF TAN

This ETF targets the solar corner of the broad clean energy space by tracking the MAC Global Solar Energy Index. Holding 23 stocks in the basket, the fund is slightly concentrated on the top ten firms with 55.5% share. American firms dominate the fund’s portfolio with nearly 50% share, followed by China (19.9%) and Hong Kong (19.2%). The product has amassed $235.2 million in its asset base and trades in impressive volume of around 98,000 shares a day. It charges investors 70 bps in fees per year. The fund has a Zacks ETF Rank #4 (Sell) with a high risk outlook and has lost 5% over the past one-month time frame (read: ETFs to Watch as Trump Races Closer to Clinton).

VanEck Vectors Solar Energy ETF KWT

This fund manages $12.5 million in its asset base and provides global exposure to 30 solar stocks by tracking the MVIS Global Solar Energy Index. In terms of country exposure, U.S. and China account for the top two countries with 26.6% and 25.3% allocation, respectively, closely followed by Taiwan (18.1%). The product has an expense ratio of 0.65% and sees paltry volume of about 1,000 shares a day. The fund has declined 6.3% in the trailing one-month period.

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