The Case for Solar ETFs

The Guggenheim Solar ETF (NYSEArca: TAN), the largest solar energy exchange traded fund, is up nearly 40%. If it were not for some high-flying China and Russia funds, TAN would be this year’s best-performing non-leveraged ETF instead of merely being one of the best.

Strong solar industry fundamentals bode well for TAN, which has climbed 3.6% since May 7.

“Solar stocks surged during the first quarter of 2015 on bullish factors including (1) broadly positive Q4 earnings news across the solar sector and positive guidance for 2015, (2) announcements by more solar companies that plan to form yieldcos, (3) indications of strong world solar demand that has solar companies running at high utilization rates and planning more capacity, (4) news that China boosted its 2015 PV installation target by 19% to 17.8 GW from the preliminary figure of 15 GW, (5) the stabilization of crude oil prices and the broader realization that crude oil prices and solar stocks have little connection, and (6) heavy short-covering,” according to a research note from MAC Global Solar Energy Index, the index provider for TAN’s underlying benchmark.

Short-covering is not a new catalyst for TAN. The ETF’s holdings, including Elon Musk’s SolarCity (NasdaqGM: SCTY) and First Solar (NasdaqGM: SCTY), are often found among the most shorted stocks. On occasion, TAN can be spotted with a high dividend yield, which is attributable to securities lending of the ETF’s components to short sellers. [Secrets of a Solar ETF]

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]

However, China, TAN’s larges country weight by 930 basis points over the U.S., has also been a thorn in TAN’s side. To be fair, the thorn has really been Hanergy Thin Film Power Group, TAN’s largest holding.