With regards to renewable energy, lower solar panel prices, price competition with China, and excess supply resulted in significant losses for solar companies and ETFs that track the solar industry. The Guggenheim Solar ETF (NYSEArca: TAN) and Market Vectors Solar Energy ETF (NYSEArca: KWT), which both track companies in the solar industry, are among the leaders in worst performing solar ETFs as both are down about 65% this year.
The solar industry is expanding at a record pace as shown by investments such as the 1,000-megawatt Blythe Solar Power project in California and the acquisition of the Topaz Solar Farm project by Warren Buffet’s company. However, massive solar industry growth in both the U.S. and China has resulted in an excess supply for this energy source and sent prices tumbling this year.
With the looming expiration of the government subsidization of renewable energy projects, which provided $3.5 billion for private investments, record domestic growth remains questionable. If the subsidization program is extended, which is highly uncertain given the political gridlock in Washington, the industry growth may continue to expand. If the subsidization program is not extended, domestic solar projects will become much more expensive and are likely to face sharp declines. With China accounting for almost half of U.S. solar panel imports, a slowdown in the U.S will affect China as well. However, a decrease in output could allow solar prices to recover, as the current excess supply will fall.
What should investors take away from this? Expect commodities to remain volatile going into 2012 as there are many factors influencing their prices. Those looking to avoid volatility may want to seek safer investments in less volatile ETFs. However, when commodities do rebound, ETFs provide investors with an excellent opportunity to capitalize on the large growth they can achieve.
Market Vectors Solar Energy ETF
August Koster contributed to this article.