If you’ve bought and held solar energy stocks over the past 12 months, you probably have first hand knowledge of what an adrenaline-fueled exercise this can be. Acquiring shares through a solar-based exchange traded fund can reduce some of the risks associated with this exciting but volatile growth industry.
For those seeking a diversified position in solar stocks, the Guggenheim Solar ETF (NYSEMKT:TAN), which tracks the MAC Global Solar Energy Stock Index, is currently the best solar ETF available. Holding 23 companies with a median market capitalization of $1.1 billion, the fund offers a pure play in solar, versus broader alternative-energy funds.
Guggenheim Solar ETF has traded for roughly eight years, with an inception date of April 15, 2008. The fund describes itself as offering “global access to all major segments of the solar industry (photovoltaic, solar thermal, and solar lighting) and the entire value chain (raw materials, manufacturing, installers, etc.).”
Major components of the fund as of mid-May 2016 include Hong Kong-traded Xinyi Solar Holdings Ltd., which is the largest position, at 7.73%, as well as First Solar, Inc. (NASDAQ:FSLR) at 6.38% of the total portfolio, SolarCity Corp. (NASDAQ:SCTY), at 5.36%, and Canadian Solar, Inc. (NASDAQ:CSIQ), at 4.71%.
Since the fund re-creates the “MAC” solar index and isn’t actively managed, stocks are removed when they no longer fit the index criteria. Thus, troubled solar developer Sun Edison, Inc. (NASDAQOTH:SUNEQ) was removed from the ETF after the index dropped the once high-flying stock from its composition on March 22, 2016.
The performance of Guggenheim Solar ETF mirrors the fortunes of this young industry. Annual returns since inception, measured in monthly pricing, have averaged negative-23.3%. Year to date, the fund is down 30.2.%. Obviously, investing in the solar industry takes both long-term conviction and an ability to weather near-term adversity.
Currently, TAN’s total managed assets stand at $221.6 million. This number is significant if you’re considering an investment in the other prominent solar ETF, VanEck Vectors Solar Energy ETF (NYSEMKT:KWT).
While the two funds have similar return characteristics, the VanEck Solar Energy ETF has seen net assets shrink to only $13.2 million as of mid-May 2016. That doesn’t mean the fund will seek to liquidate, but nonetheless, that’s quite a meager amount of assets under management, and potential holders of KWT should be aware of this fact before investing.
The Guggenheim Solar ETF applies a net expense fee of 0.7% to your investment, which isn’t the most efficient expense ratio you’ll encounter, though it can’t be characterized as exorbitant either. The fund pays an annual dividend each December, which, based on last year’s distribution, equates to a current yield of 2.3%.
Alternatives in an alternative-energy ETF
If the tendency of pure solar ETFs to drop precipitously makes it difficult to invest in an idea that otherwise appeals to you, there are broader-based alternative-energy ETFs available, which hold renewable and clean-energy manufacturing, research, and utility companies.
PowerShares WilderHill Clean Energy Portfolio (NYSEMKT:PBW) is an example of a fund that provides an indirect investment in the solar industry. Currently, two of the fund’s top 10 holdings are solar companies: SolarCity and Canadian Solar, which together make up nearly 7% of the ETF’s total portfolio. PBW has roughly $92 million of net assets under management and sports a similar expense ratio to the Guggenheim Solar ETF, at roughly 0.7%.
Yet while an investment in this ETF buys you some diversification outside solar, the truth is that alternative energy in general is also at a relatively early stage of development. Since inception in March 2005, the WilderHill Clean Energy ETF has lost roughly 75% of its value.
Thus, if you don’t mind a holding period that might get measured in years, the Guggenheim Solar ETF is the best current solar ETF choice available. According to the MAC index sponsor, the market for new global electricity generation will reach $4 trillion by 2030, and solar has the potential to supply a significant portion of this need. For now, “potential” is the key word to apply to any investment in solar energy.
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Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.