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TAN: A Solar ETF That Could Make You Look Good (Just Don’t Get Burned)

Summary

  • The Invesco Solar ETF has been on a run this year and is up 120%+ due to hopes of a Biden victory and a strong policy pivot to renewable energy.
  • Global solar growth – not just in utility-scale solar arrays, but smaller residential and commercial systems – is expected to soar by an estimated 720 GW by 2024.
  • However, valuations are high and #1 holding SolarEdge’s Q3 EPS report and guidance and the after-hours pullback in the stock clearly show the risks involved.
  • With the presidential election results so close at hand, investors considering a position in TAN should be cautious regarding the potential political impact on the ETF’s valuation.

 

 

After years of underperforming the broad market, the Invesco Solar Portfolio ETF (TAN) has come to life in 2020 and is up 120%+ YTD. The fund is based on the MAC Global Solar Energy Index and is directly exposed to the global trend of adopting and deploying renewable solar energy in order to reduce emissions and enable a more sustainable future.

 

The Future Is Bright

Many investors might be surprised to find out that for full-year 2020 solar energy deployment in the U.S. for new electrical power generation capacity is expected to significantly exceed that of natural gas power-gen and is #2 only behind wind power:

 


Source: EIA

 

The total estimated added capacity of 13.5 GW would be a record high – significantly surpassing 2016’s record 8 GW of added solar capacity.

 

The EIA reports that more than half of the utility-scale solar photovoltaic (“PV”) capacity additions will be in sunny Texas (22%), California (15%), Florida (11%), and South Carolina (10%). In addition, according to the EIA’s Short-Term Energy Outlook, 5.1 GW of additional small-scale residential/commercial solar PV capacity will be added by the end of 2020.

 

And the solar PV growth rate shows no sign of slowing. I say that based on NextEra Energy’s (NEE) recent Q3 quarterly presentation. NextEra, which most of you know recently displaced Exxon Mobil (XOM) as the largest U.S. energy company by becoming the world’s largest producer of wind and solar energy, said its Energy Resources segment had a record quarter of renewable power development with 911 MW of new solar capacity:

 

Source: NextEra Q3 Presentation

 

Note that brings the total for 2021-2022 added solar power to 3.7 GW. Perhaps even more significant is that battery storage is quickly ramping up and the 594 MW booked in Q3 was more than 50% of the new solar bookings – indicating that many of the solar projects are a combination of solar PV+battery backup.

 

But solar power isn’t just a U.S. phenomenon. The International Energy Agency (“IEA”), which should not be confused with the U.S. Energy Information Agency (“EIA”), published its Renewables 2019 Report last October, and forecasts:

 

…that the world’s total renewable-based power capacity will grow by 50% between 2019 and 2024. This increase of 1,200 GW – equivalent to the current total power capacity of the United States – is driven by cost reductions and concerted government policy efforts. Solar PV accounts for 60% of the rise. The share of renewables in global power generation is set to rise from 26% today to 30% in 2024.

 

For solar PV to account for 60% of the rise implies total global solar capacity will grow by a whopping 720 GW by 2024. Note the IEA says it won’t just be utility-scale solar PV additions that will drive global growth: “The installation of solar PV systems on homes, commercial buildings and industrial facilities is set to take off over the next five years, transforming the way electricity is generated and consumed.” That’s because, according to Sunrun (RUN), the cost of an average 6 kilowatt hour residential solar system 10 years ago could cost more than $50,000. Now, a typical home installation ranges from $16,200 to $21,400:

 

Source: Sunrun

 

Also according to Sunrun, as long as a solar energy system is installed by year-end 2020, in the U.S. the federal solar tax credit gives a dollar-for-dollar reduction against your federal income tax equal to 26% of the final cost of solar energy systems. Starting in 2021, the tax credit will drop to 22%. After 2021, unless more action is taken by Congress, the tax credit for residential solar ends. By the action in the solar stock prices, it would appear the assumption is that a Biden presidency would likely maintain some level of federal tax incentives for residential solar energy.

 

As the Wall Street Journal reported recently, the plummeting cost of wind and solar power has renewable energy competing with fracking in battleground Pennsylvania for the “future of energy.” The WSJ also reports that the combination of high electricity bill, power outages, low interest rates, and people spending more time at home has been a boon for companies involved in the residential solar market.

 

Top-10 Holdings

The TAN ETF’s top-10 holdings are shown below along with a pie-chart of the global holdings. The U.S. leads the way at about half of the total portfolio, followed by China with a 22.5% weighting:

 


Source: TAN Fact Sheet

 

The ETF’s #1 holding at 10% is SolarEdge Technologies (SEDG) which blew past consensus estimates with Monday’s Q3 EPS report – as earnings of $0.83/share was, according to Seeking Alpha, a $0.25 beat. But shares were down $50+ in after-hours trading due to what I presume was rather weak guidance for Q4 (relatively flat sequential revenue growth). As a result, expected TAN to take a significant drop Tuesday morning, which may have been a great opportunity to establish a position. Enphase Energy (ENPH), the #3 holding and a microinverter manufacturer that directly competes with SolarEdge, was also down in after-hours trading (currently -2.8%) – likely in sympathy with SEDG’s results.

 

Other holdings include SunrunFirst Solar (FSLR), Vivint Solar (VSLR), and JinkoSolar (JKS) – which have all had strong runs this year with Sunrun and Jinko leading the way:

ChartData by YCharts

 

Performance

As mentioned earlier, until this year the TAN ETF was pretty much dead money over the past decade:

 

Source: TAN Fact Sheet

 

However, similar to the Invesco WilderHill Clean Energy Portfolio ETF (PBW), TAN started rallying as polling data showed Joe Biden’s chances of winning the presidential election greatly improving during the month of October (see PBW: Charged-Up By Odds of A Biden Victory). That’s because “The Biden Plan For A Clean Energy Future” includes proposals to:

 

  • “Ensure the U.S. achieves a 100% clean energy economy and reaches net-zero emissions no later than 2050.”
  • “Rally the rest of the world to meet the threat of climate change.”
  • “The Biden plan will make a historic investment in our clean energy future and environmental justice, paid for by rolling back the Trump tax incentives that enrich corporations at the expense of American jobs and the environment.”
  • “Biden’s climate and environmental justice proposal will make a federal investment of $1.7 trillion over the next ten years, leveraging additional private sector and state and local investments to total to more than $5 trillion.”

 

These policies are obviously bullish for the companies in the TAN ETF. Speaking of the competing PBW ETF, note that TAN has outperformed it by almost 40% this year.

 

Risks

As shown earlier with the SolarEdge EPS report and guidance, and the after-hours trade, the risks are considerable with this ETF. After the big run in the solar stocks this year, valuations are high:

Source: TAN Fact Sheet

 

With a negligible dividend yield, a FWD P/E=44.5, and a price/book of 2.7x, the stocks in this portfolio have much of the global growth rate of solar built in already. And, of course, there is always a chance that Biden loses the election and the U.S. goes back to the “make coal great again” administration. If that happens, the valuations of the TAN stocks will, I believe, take a big hit.

 

TAN’s expense ratio is relatively high at 0.71% and likely reflects the active management required to trade volatile stocks as well as a premium for the international exposure.

 

Summary and Conclusions

The TAN ETF has been a laggard for over a decade. But not this year. Signs of a Biden victory and a drastic change in U.S. energy policy favoring renewables have the TAN ETF on the move this year – up 123% YTD. However, the fund is very likely to take it on the chin on Tuesday morning due to the SolarEdge news mentioned earlier. That could be a great opportunity to pick up TAN on a significant pullback. Then all the investor would have to worry about is Biden actually winning the election and the growth rate of renewables in the U.S. actually accelerates to meet current expectations. If Trump wins, there will be no “Biden Plan” for renewables in the U.S., and this ETF could, once again, become a laggard until the stocks are revalued to take into account the lack of such supportive U.S. government policies for solar energy.

 

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