A recent pullback in clean energy stocks portends opportunity with several exchange traded funds, including the Invesco Solar ETF (TAN). New data is confirming the durability of solar power during the coronavirus pandemic.
TAN seeks to track the investment results of the MAC Global Solar Energy Index, which is designed to provide exposure to companies listed on exchanges in developed markets that derive a significant amount of their revenues from solar power equipment producers, including ancillary or enabling products.
Over the past year, the fund is up a whopping 255%.
“Electricity production from solar projects continues to exceed initial estimates with many solar projects performing so well operationally that some ratings are equivalent to those of the off-taker,” according to Fitch Ratings. “Conversely, wind projects are still largely underperforming against expectations. Fitch reports that 73% of annual observations from its rated solar projects were within 5% or better of the original P50 levels. By contrast, only 24% of wind project observations were within 5% or better of the original P50 levels.”
A TANtalizing Investment Case
TAN could rebound over the near-term because the Biden Administration is feeling pressure to make good on campaign promises. That includes sizable renewable energy spending in the upcoming $2 trillion infrastructure proposal.
Emerging markets are also taking a cleaner approach as they try to cut down on pollution. For example, China, the world’s second-largest economy, has suffered from heavy pollution after it quickly industrialized its economy. Yet the country has also heavily adapted to solar as a means to combat the rising pollution and shift away from dirty coal.
“Running counter to broad swaths of the infrastructure sector, performance-related downgrades in 2020 did not deviate from historical norms. ‘The ongoing global pandemic has had a muted impact on this class of credits that are largely insulated from demand risk and have remained operationally stable,’ said Senior Director Andrew Joynt,” notes Fitch.
Not only is clean energy consumption increasing, but costs are also decreasing, which in turn bolsters adoption. Additionally, coal production is slumping, adding to the virtuous cycle for alternative energy ETFs. Declining solar costs are expected to lure more corporate and residential customers, particularly in the solar market.
“Meaningful changes are underway in the renewables sector. Ever-growing corporate sustainability goals should continue to fuel the growth of commercial and corporate PPAs. ‘The typically shorter tenors of these contracts suggest that we will continue to see more financings that stretch into a merchant period,’ said Joynt,” according to Fitch.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.