Last week was an eventful one for the Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT).
TAN and KWT slid 8% and 7%, respectively, with the bulk of those declines attributable to controversial Hanergy Thin Film Power Group. Shares of Hanergy plunged 47% in Hong Kong trading Wednesday before being halted. 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]
Last Thursday, MAC Solar, the provider for TAN’s underlying index, will boot Hanergy Thin Film at the close on the date the embattled Chinese solar firm resumes trading. Market Vectors has made no such announcement regarding, but last week’s action in solar ETFs, TAN in particular reminds investors that there are risks with niche ETFs.
“At issue are heavy concentrations of single stocks that can creep into niche ETFs and diminish the advantages of the diversification found in conventional index investing. Many narrowly focused ETFs are too top-heavy to be useful—in some instances, owning a handful of single stocks might be preferable. And investors might be surprised by heavy single-stock concentrations in some international ETFs,” reports Chris Dieterich for Barron’s.
As of May 19, Hanergy was TAN’s largest holding at a weight of 11.98% 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). [Hanergy Punishes Solar ETFs]
As Barron’s notes, other niche ETFs are top-heavy. For example, the top four holdings in the Global X Social Media Index ETF (NasdaqGM: SOCL) combine for over a third of that ETF’s weight. Some international ETFs are afflicted with the same condition. Barron’s highlights the iShares MSCI Spain Capped ETF (NYSEArca: EWP), among others, where just three stocks command almost 44% of the fund’s weight.
Not all narrowly-focused ETFs present single-stock risk to investors. The wildly popular PureFunds ISE Cyber Security ETF (NYSEArca: HACK) allocates no more than 5.8% of its weight to any of its 31 holdings.
The BioShares Biotechnology Clinical Trials Fund (NasdaqGM: BBC),which only includes companies with a lead drug candidate in a Phase 1, Phase 2 or Phase 3 trial, allocates no more than 3.62% of its weight to its roughly 65 holdings.
Guggenheim Solar ETF
