Single stock risk has come to roost for the Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT).
TAN, the largest solar exchange traded fund, is off 10.1% on volume that is approaching triple the trailing 90-day average, making it the worst-performing non-leveraged ETF to this point in Wednesday’s session. KWT is off 6% on double the average volume making it the second-worst non-leveraged ETF today behind TAN.
The culprit for the solar ETFs’ woes is Hanergy Thin Film Power Group, shares of which plunged 47% in Hong Kong trading before trading was halted in the stock. Controversy has been swirling around Hanergy, including the fact that its closely held parent company accounted for nearly two-thirds of last year’s revenue. [Reason for Caution With Solar ETFs]
As is often the case with solar stocks, including those that reside in TAN and KWT, Hanergy is heavily shorted. As of May 19, Hanergy was TAN’s largest holding at a weight of 11.98%, 250 basis points more than ETF allocates to SunEdison (NasdaqGS: SUNE). KWT came into trading today with an almost 8.4% weight to Hanergy, making the stock the ETF’s second-largest holding.
Top-heavy sector and industry ETFs are not uncommon. Most cap-weighted technology ETFs feature allocations to Apple (NasdaqGS: AAPL) that are often 500 basis points or more above the funds’ second-largest holdings. Cap-weighted energy ETFs often sport massive combined weights to Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).
The lesson, one previously taught by Apple, is that so goes a stock that accounts for 10%, 15% or more of an ETF, so goes that ETF. [Apple’s Rise not Luring ETF Investors]
“According to Markit data, roughly 15% of the float is out on loan, presumably to short sellers,” according to the Wall Street Journal.