The United States Oil Fund (NYSEArca: USO) and the Energy Select Sector SPDR (NYSEArca: XLE) make for predictable victims during a bear market for oil.
That has indeed been the case as USO is off 17.8% over the past month while XLE, the largest equity-based energy ETF, is lower by 8.4% over the same period. However, oil weakness is hampering some alternative energy ETFs, including the Guggenheim Solar ETF (NYSEArca: TAN), which has tumbled 5.5% over the past month.
Conventional wisdom dictates that as oil rises, solar stocks benefit because those high oil prices shine a light on the benefits of alternative energy sources, including solar. The reverse is true as oil falls. As a result of oil’s weakness, short sellers are piling into solar stocks and TAN.
“Far from seeing a lift, bearish trading activity is on the rise in this ETF. Interactive Brokers says that short-sellers, who borrow shares in hopes of selling shares and then buying back later after prices fall, are paying 27% more in the lending market than two weeks ago. That makes TAN hard to borrow in the parlance of Wall Street trading desks, meaning that shorting it is difficult and expensive,” reports Chris Dieterich for Barron’s.
Underscoring the impact oil prices have on solar stocks and ETFs is TAN’s recent bout of weakness comes after the Obama Administration called for tougher rules on greenhouse gas emissions and a greater target for renewables. [White House Doesn’t Lift Alt Energy ETFs]
Last Monday, President Obama announced a revised Clean Power Plan that will increase the required cuts in carbon emissions from the power sector to 32% from 2005 levels by 2030, up from the 30% requirement in the original draft, reports Everett Rosenfeld for CNBC.
The involvement of short-sellers in TAN and the ETF’s holdings is not new. TAN’s holdings are often among the most-shorted names on Wall Street and while getting involved with an ETF that is more than 33% below its 52-week high, there is at least one potential advantage of TAN’s constituents seeing elevated short interest: A potentially impressive yield.
“But over the past few years, the ETF has beaten the MAC Global Solar Energy Index by a median of 3.6 percentage points a year,” reports Ari Weinberg for the Wall Street Journal. “That’s because like many funds, Guggenheim Solar, lends some of its holdings to other investors, often short sellers looking to bet that prices will fall. The fund collects a fee, which can balloon when demand is high.”
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]
Guggenheim Solar ETF
