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Why This Solar ETF Could Shine Again This Year

ETF Professor

Last year was a great time to be involved with alternative energy equities and the related exchange traded funds. While plenty of diversified funds in the space rallied in considerable fashion, solar was particularly strong as highlighted by an annual gain of almost 67% for the Invesco Solar ETF (NYSE: TAN).

Asking for TAN, the benchmark solar, to gain another 67% this year is asking a lot, but expecting the fund to notch another positive performance isn't asking for much at all. Not when there's a slew of favorable fundamental factors backing the solar sector.

“Global solar installations will continue double-digit growth rates into the new decade,” IHS Markit said in a recent note. “New annual installations in 2020 will reach 142 gigawatts (GW), a 14 % rise over the previous year.”

Why It's Important

Adding to the allure of TAN, which follows the MAC Global Solar Energy Index, in 2020 are ongoing efforts by emerging markets to finally pull their weight when it comes to pollution. Just look at the China conundrum. The world's second-largest economy is one of the globe's worst offenders when it comes to pollution, but it's also a voracious solar consumer.

“Solar demand in 2020 will be lower than historic installation peaks of 50 GW in 2017,” said IHS Markit. “Demand in China is in a transitional phase as the market moves towards solar being unsubsidized and competing with other forms of generation and there is some lingering uncertainty while awaiting the release of the new 14th Five-Year Plan to be announced next year.”

After the U.S. at 46.40%, China's is TAN's second-largest geographic exposure at 22.71%, according to issuer data.

What's Next

Speaking of the U.S., increased corporate adoption of solar panels coupled with more states pushing utilities to green energy solutions could be factors adding to the case for TAN this year.

In the U.S., “installations are expected to grow 20% in 2020, consolidating the United States’ position as the world’s second largest market. California, Texas, Florida, North Carolina and New York will be key drivers of U.S. demand growth over the next five years,” according to Markit.

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