Tumbling oil prices have tripped up a slew of predictable victims among exchange traded funds, including solar funds.
On Monday, the Guggenheim Solar ETF (NYSEArca: TAN) fell 5.2%, making the largest solar ETF the fifth-worst non-leveraged ETF on the day. That after TAN tumbled 5% last Friday. The rival Market Vectors Solar Energy ETF (NYSEArca: KWT) was barely better with a Monday loss of 4.6%.
Underscoring the solar sector’s sensitivity to oil prices (solar stocks and ETFs often perform better when oil prices rise), TAN is now lower on a year-to-date basis, though the ETF’s 3.7% 2014 loss is not nearly as startling as the 25.5% plunge notched by the United States Oil Fund (NYSEArca: USO). [A Brutal Coming for Oil ETFs]
“Analysts in recent years have debated whether alternative energy stocks are directly correlated to the price of crude oil. Some contend that pricier oil pushes renewable energy companies higher, as investors and consumers search for cheaper alternatives to fossil fuels,” reports Michael Perrault for Investor’s Business Daily.
However, the declines for KWT and TAN since peaking in early March on stunning. Since peaking on March 6, TAN and KWT are each down nearly 33%, declines that outpace the loss suffered by USO by almost 500 basis points over the same period.
It was not supposed to be this way in 2014 for solar ETFs. TAN more than doubled last year, making it not only the year’s best energy ETF, but also the best non-leveraged ETF of any stripe. From the start of 2014 through March 6, TAN surged nearly 43%.
Investors’ desire to be involved with solar stocks will be tested the long oil prices languish, a grim outlook at a time when about two-thirds of TAN’s 29 holdings have traded lower over the past six months.
“The prime suspect for the recent decline has been the falling costs of hydrocarbons, whose continuing abundance and relative cheapness threaten to put a damper on solar appetite in the coming years. With oil prices down by a quarter in the last six months and with little sign of any impending rebound, commitments to solar projects will no doubt be tested even in the wake of the recent falling costs experienced by the industry,” according to Markit.
Traders have been positioning for further declines in TAN and the ETF’s holdings, a familiar scenario as solar stocks are often heavily shorted. That has allowed TAN to outpace its underlying index and, at times, deliver a decent dividend yield while tracking a sector not known for its dividends. [Short Covering Could Lift Solar ETFs]
“The average short interest in the constituents of the TAN ETF has surged in the last few months and now stands at 6.6%. Levels have increased significantly since September and recently hit a fresh annual high on November 18th when average short interest hit 7.2% of shares outstanding which is very high when compared to the average of just 2.2% for the average company in the S&P 500,” notes Markit.
Guggenheim Solar ETF
