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The Sun Could Be Ready To Set On The Solar ETF's Big Run

ETF Professor

With a year-to-date gain of almost 38 percent, the Invesco Solar ETF (NYSE: TAN) is easily one of this year's best-performing non-leveraged exchange traded funds.

What Happened

TAN is enjoying plenty of tailwinds this year, high oil prices chief among them. Additionally, declining costs for alternative forms of energy, including solar, are prompting consumers and utilities to move away from traditional fuel sources, such as coal.

TAN, the largest ETF dedicated to solar stocks, is up 11 percent in April, confirming the notion that betting against the fund and its components has been a fool's errand in 2019.

Why It's Important

Seasonal trends can make for interesting anecdotes and useful pieces in a broader trading plan, but shouldn't be used as the sole reason to enter or exit a trade. That said, history often repeats in financial markets and TAN's history for the upcoming months is dubious.

Historically, the December through April period is the best time of the year in which to be long TAN while the solar ETF often struggles in the May through November time frame.

The solar ETF often experiences “a seven-month losing streak from May right into November, before the ETF flips narrowly positive in December,” reports Schaeffer's Investment Research. “Within that historically weak stretch, June has the lowest percentage of positive returns, at only 27%. During both June and August, meanwhile, TAN averages a monthly loss in excess of 2%.”

What's Next

Interestingly, the end of TAN's favorable season period coincides with the end of the energy sector's favorable seasonality. In July and October, the Energy Select Sector SPDR (NYSE: XLE) is usually the worst-performing member of the sector SPDR ETF suite.

In July, TAN only finishes higher 45 percent of the time with the figure dipping to 36 percent in October. During the seven months spanning May through November, TAN historically averages negative returns in each of those months with July being the “best” with an average loss of 0.45 percent.

“However, it may be after Labor Day where TAN suffers its heaviest losses,” according to Schaeffer's “The ETF averages a drop of 3.27% in September, followed by mean declines of 5.21% in October and 4.45% in November. Plus, its average negative return is in the double digits for all of the last four months of the year.”

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