The Invesco Solar ETF (NYSEARCA: TAN), the largest exchange traded fund dedicated to solar equities, is off more than 28% this year and it is possible that solar stocks will see more headwinds in the new year.
TAN, which is nearly 11 years old, follows the MAC Global Solar Energy Index. That index “is comprised of companies in the solar energy industry. The index is computed using the net return, which withholds applicable taxes for non-resident investors,” according to Invesco.
The $237.2 million TAN holds 23 stocks, all of which are classified as mid- and small-cap names. Regardless of market capitalization segment, solar equities face some challenges in 2019. Some of the issue is waiting for politicians to prioritize clean energy on a national scale.
“Long term growth for solar will be organic. What will add fuel to the fire in the United States is going to be the next Democratic or environmentally friendly president or Congress,” according to Seeking Alpha. “It may not be in 2020 but may be 2024, there will however be a chief executive who will place clean energy near the top of their agenda. Until then, it is just a waiting game.”
TAN allocates almost 42% of its weight to domestic solar names, but the fund also features an almost 29% weight to China. Chinese stocks, solar or otherwise, are among the worst-performing emerging markets names this year, adding an extra drag on TAN. The average market value of TAN’s holdings is $1.55 billion, confirming that this fund is vulnerable to bearishness in small caps.
Until solar is more widely embraced by politicians at the national level, “investors need to understand that this fund is meaningfully more volatile than its peers and likely the majority of investments you may own,” according to Seeking Alpha. “Even though the fund is down nearly 30% year to date, it may continue to drop in the future as the impacts of a broader recession take hold.”
Even with a significant fourth-quarter decline, TAN is not particularly cheap on valuation as highlighted by a price-to-earnings ratio of 32.43x.
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