In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
Profit from a Bright 2011 for the Solar Energy Sector
01/25/2011 7:07 am EST
The year 2010 brought nervous extremes to the energy sector as a whole, as the year started off with the Deepwater Horizon spill, sending energy equities across the board into a freefall. Despite this tragedy, some analysts felt that the vast amounts of oil that had spewed into the Gulf of Mexico would finally force the US government to make a push for cleaner energy. Investors and traders in clean energy had similar hopes, but all to no avail; clean energy finished out the year as one of the worst sectors by far. But with our demand for fossil fuels constantly growing and supply steadily shrinking, there may come a day when we have no choice but to adopt numerous alternative energy sources.
As the economic situation has improved around the world, investors have begun to bid up the price of oil once again, putting renewed focus on alternative forms of energy. This has pushed many ETFs in the sector sharply higher so far in 2011, but it has been especially kind to one form of alternative power: Solar.
Although we are just a few short weeks into 2011, solar energy has already emerged as one of the front-running ETF sectors, with gains topping 10% in just three trading weeks. But after 2010 was such a rough year for many of these funds, the recent surge has left investors scratching their heads. A closer look into the solar industry helps to shed some light on some of the reasons why these ETFs are performing so well in such a short period of time.
Solar Industry in Focus
To start things off, the world’s largest solar energy project was recently offered a loan totaling just under $1 billion dollars. Construction on the Agua Caliente Solar Project in the Arizona desert began in 2010 and is expected to be complete by 2014. The project, headed by NRG Energy (NRG), will be exclusively using photovoltaic modules produced by First Solar (FSLR). The project will create more than 400 jobs, and “Will avoid 237,000 metric tons of greenhouse gas emissions per year, equivalent to taking more than 40,000 cars off the road annually” writes Carmen Doyle. Already, Pacific Gas & Electric Company has entered into a 25-year contract with NRG to purchase power generated from this robust plant.
Another announcement recently surfaced that nudged solar energy in the right direction. Prime Time Produce, “The largest grower, packer, and shipper of sweet peppers—those red, green and yellow ones—in the United States,” revealed the installation of solar modules that will supply almost all of its power needs during peak hours, and more than enough in the off-season, reports Amanda H. Miller. The solar panels will generate enough energy to power the massive 75,000 square foot packaging plant. The installation of these panels gives two benefits to Prime Time: Attractive cost benefits, and they are environmentally friendly. The clear cost efficiency that photovoltaic modules provide is starting to catch on, even for smaller sized businesses, a trend that may continue for the duration of 2011 and help to boost demand across the sector.
Reports like these from medium-sized companies point to the fact that the industry could be in for a great year globally, even despite a possible slowdown in Germany. In fact, some are predicting that worldwide solar installations will hit 19.3 gigawatts in 2011, representing substantial growth over the 15.8 GW level in 2010. A big part of this predicted increase comes from tax legislation right here in the US. The 1603 Treasury grants were extended in late December 2010, which allows investors in commercial solar projects to recoup their tax rebates upon completion of projects, instead of having to wait until the filing date to do so. This could help to keep cash flowing quicker in the industry and potentially lead to more projects as well.
Lastly, solar industry advocates are also cheering the large number of RPS (renewable portfolio standard) plans, which are hitting the market all across the country. These documents require utilities to produce or obtain a specified percentage of their electricity from renewable sources, basically forcing companies to buy alternative fuels. Close to 30 states already have such programs in place, while seven more have RPS goals, suggesting that demand will soon be there for renewables of all types here in the US, and that it is unlikely to go away any time soon.
NEXT: Two ETFs to Profit from the Rise of Solar Energy|pagebreak|
Amidst all of this positive news for the solar industry, ETFs tracking these companies are looking bright. Below, we outline two ETFs for traders and investors to profit from the current jump in solar energy.
Market Vectors Solar Energy ETF (KWT)
This fund measures the Ardour Solar Energy Index, which provides exposure to publicly traded companies from around the world that derive at least 66% of their revenues from solar power and related products and services. The fund’s top holdings include Trina Solar (TSL) (10%), First Solar (9.8%), and JA Solar Holdings (5.4%). KWT takes a more international stance when it comes to its securities, with just 28% of its assets dedicated to the US, and the rest of its holdings falling into countries like China (32.9%) and Germany (17.3%). The fund has gained over 13% in 2011 alone, but is still down 11.5% over the past 52 weeks.
Guggenheim Solar ETF (TAN)
TAN seeks to replicate the performance of the MAC Global Solar Energy Index, which is designed to track various companies from all around the solar industry. The fund’s top holdings are First Solar (19.4%), Trina Solar (6.5%), and Renewable Energy Corporation (RNWEF) (6%). TAN holds roughly half of its assets in the US, and the rest are focused on various nations, including China (26.7%) and Germany (16.6%).
From a performance standpoint, TAN has gained 10.4% on the year, which is in sharp contrast to its 52-week performance of -14.2%. TAN may be a better choice for investors who prefer more US exposure, though for the time being, China is the most competitive nation in the solar industry, possibly giving KWT a leg up in terms of allocations to this rapidly expanding market.
By the Staff at ETFdb.com
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