A few things standout about lists of this year’s top-performing exchange traded funds. The obvious being the dominance of China and Russia funds, but almost as clear is the presence of several alternative energy ETFs.
Painting a picture of just how strong alternative energy ETFs have been this year is this nugget: The Market Vectors Global Alternative Energy ETF (NYSEArca: GEX) and the First Trust NASDAQ Clean Edge Green Energy Index Fund (NasdaqGS: QCLN) are up 19% and 13.7%, respectively, and that does not put either close to being among the best alternative energy ETFs.
Those performance pale in comparison to the average return of 35% for the Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT) and the 32.3% returned by the iShares Global Clean Energy ETF (NYSEArca: ICLN). Importantly, alternative energy industry fundamentals are solid. [Clean Performance for Clean Energy ETFs]
“Demand for clean energy continues to rise. China remains a big part of the story: It’s targeting a record 17.8 gigawatts of solar installations in 2015, according to Bloomberg Intelligence. More evidence comes from SolarCity (NasdaqGM: SCTY), which doubled its installations of solar panels in 2015’s first quarter, compared with the same period a year ago,” writes Eric Balchunas for Bloomberg.
However, investing in alternative energy stocks and ETFs can be a volatile proposition. For example, TAN’s constituents are often heavily shorted and that ETF along with the rival KWT recently took some lumps thanks to Hanergy Thin Film Power Group.
That company and its shares have recently come under fire because Hanergy Thin Film Power Group mainly supplies solar panel equipment to its private parent company Hanergy Group, and some have questioned the accounting practices, which have fueled the short bets. [Hanergy: A Drag on Solar ETFs]
“This year’s runup in clean energy ETFs highlights the volatility of these investments, which have had years of horrible underperformance. Even with the recent jump, both ETFs have underperformed the S&P 500 by more than 100 percent since 2009,” Balchunas said of GEX and TAN.
When it comes to solar ETFs, volatility is the price to pay for increasingly sturdy fundamentals.
China is planning to install as much as 17.8 gigawatts of solar power this year, or two-and-a-half times the capacity added by the U.S. in 2014 as part of the country’s aggressive plans to cut carbon emissions. For instance, the country’s recent move away from small coal plants will avoid the annual release of as much as 11.4 million metric tonnes of carbon dioxide, which could help cut emissions for the first time in over a decade, Today Online reports. [China Initiative Drives Solar ETF Higher]
TAN has a standard deviation of 43.2% while KWT’s three-year standard deviation is 37.1%
Market Vectors Global Alternative Energy ETF