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.
Securities lending has, at times, benefited TAN in another way: Juicing the dividend yield on an ETF tracking an industry not known for being home to many dividend stocks. At one point in August 2013, based on its 2012 distribution, TAN was sporting a dividend yield of 5.3%. [Solar ETF’s Holdings See Surge in Short Interest]
TAN and KWT, still among this year’s top-performing non-leveraged ETFs with gains of 25.4% and 20.3%, respectively, have recently dealt with another headwind: The realization that Yingli Green Energy (NYSE: YGE), the world’s second-largest solar manufacturer by shipments in 2014, may not be in business much longer.
Even with today’s 24.5% gain, shares of Yingli Green are off 41% over the past month. KWT allocates 0.56% to Yingli Green while the stock commands 0.89% of TAN’s weight.
Guggenheim Solar ETF
ETF Trends editorial team contributed to this post.