How To Invest in Solar Energy (TAN ETF Review)
Solar is the most abundant source of energy on Earth. As demand for renewables continues to grow, solar stocks and funds should win in the long run. Learn how you can invest in solar power through ETFs like TAN and RAY or by buying single stocks.
SustainFi October 5, 2021
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Why invest in solar energy
Like other renewable energy stocks, solar stocks have struggled in 2021 after a great 2020. But the longer-term thesis is still there, and the slump could be a buying opportunity. Here is why.
More global electricity generation should come from solar
Although only about 2% of the world’s electricity comes from solar, since 2016, solar has overtaken wind as the fastest-growing renewable technology.
Solar provides around 3% of U.S. electricity today, but the Energy Department believes that solar could generate up to 40% of U.S. electricity by 2035 and 45% by 2050. This ramp-up would require spending as much as $562 billion.
Solar is now price-competitive with fossil fuels
The solar industry no longer needs to rely on government subsidies to be price competitive with fossil fuels. According to research by investment bank Lazard, large solar plants are already price-competitive with natural gas.
Solar panels are also the cheapest way of generating electricity in many places. According to research from S&P Platts, the cost of solar fell by 80% in 2010-2020. And residential system prices are expected to fall 17% over the next five years, while utility-scale solar installation prices should decline by 20%, says Wood Mackenzie.
Regulations favor solar energy
Solar energy is also benefiting from regulations. For example, California requires all newly constructed buildings to have rooftop solar panels starting in 2020. And Nevada requires its utilities to get half of their power from renewables by 2030.
Why are solar stocks so volatile?
Despite these trends, solar energy stocks have been very volatile. Although the Invesco Solar ETF (TAN) returned 285% over the past five years (vs. 100% for the S&P 500), it is down -25% in 2021 (through October), while the S&P 500 returned almost 20%.
Over the past decade, the “solarcoaster” was driven by changes in subsidies, tariffs, heavy debt loads, commoditization of solar panels, and oil prices.
Subsidies. Solar power has relied on government subsidies and tax credits in its largest markets, the U.S. and China. Changes to subsidies have created uncertainty and volatility. In the U.S., solar tax credits are currently being phased out.
Chinese competition. And, a decade ago, Chinese solar panel manufacturers drove down costs which increased installations but reduced margins. A lot of U.S. solar panel manufacturers went out of business as a result.
The sector is also sensitive to changes in oil and natural gas prices.
As a result, we do not recommend putting a material percentage of your assets into solar. As always, do your homework before investing.
Solar energy exchange-traded funds (ETFs)
Instead of picking solar stocks, you might find it easier to invest in a solar ETF. As of October 2021, there are two solar ETFs.
|Fund||Invesco Solar ETF||Global X Solar ETF|
|Assets||$2.96 billion||$2 million|
As of 9/30/2021
Invesco Solar ETF (TAN)
- Date launched: 2008
- Assets: $2.96 billion
- Expense ratio: 0.69% ($69 on a $10,000 investment each year)
- Year-to-date performance (through October 2021): -25%
- Holdings: 53
- Top three stocks: SolarEdge, Enphase Energy, and Xinyi Solar
TAN is the largest ETF investing in solar energy. Launched in 2008, it tracks an index of global solar energy companies (the MAC Global Solar Energy Index), overweighing “pure-play” companies.
There aren’t many publicly traded solar businesses, so this ETF owns around 50 companies, mainly in the U.S., China, and Spain. The top ten stocks are over 50% of the fund’s assets. The top three are SolarEdge (SEDG) (10%), Enphase Energy (ENPH) (10%), and Xinyi Solar (HKG:0968) (7%).
As expected, TAN has been very volatile. The fund was up 234% in 2020 but declined -25% in 2021 through October.
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Global X Wind EGlobal X Solar ETF (RAYS)
- Date launched: September 2021
- Assets: $2 million
- Expense ratio: 0.50% ($50 on a $10,000 investment each year)
- Holdings: 50
- Top three stocks: Sungrow Power, Tianjin Zhonghuan, Longi Green
Launched in September 2021, the Global X Solar ETF (RAYS) tracks the Solactive Solar Index, investing in companies involved in the solar sector. This includes companies in solar power production, the integration of solar into energy systems, and the manufacturing of solar-powered generators, engines, and batteries.
Unlike TAN, this fund is more exposed to China (which is over 40% of assets), followed by the U.S. (29%). RAYS is also more invested in technology stocks, and less in solar-powered utilities.
Unlike TAN, RAYS incorporates environmental, social and governance (ESG) screens and follows ESG proxy voting guidelines “to affect positive change alongside financial returns.”
Although so far RAYS has only attracted $2 million in assets, it’s cheaper than TAN and costs 0.50% (vs. TAN’s 0.69%.)
Solar energy stocks
If you want to buy individual stocks, you can invest in solar panel manufacturers, solar panel installers, or utilities that rely on solar power.
Manufacturer stocks were hurt this year by rising costs, including steel and polysilicon, as well as shipping costs and the lack of shipping containers.
You should also know that in the U.S. the federal tax credit on home solar drops from 26% in 2021-2022 to 22% in 2023, then goes away in 2024. The Biden administration supports extending it, but that has yet to happen.
We would argue that the longer-term trend for solar is still positive. Here are several stocks you could invest in.
Arizona-based First Solar (FSLR) is one of the biggest solar panel manufacturers and solar project developers in the world. It is also the largest U.S. solar manufacturer, specializing in panels for large-scale installations. FSLR is one of the few U.S. solar panel makers to survive Chinese competition over the past decade.
While the solar panel market is very competitive, FSLR should benefit from continued growth in demand for solar panels. They also continue to win large solar farm installations. The company has recently announced the building of a $680 million factory in Ohio.
SolarEdge (SEDG) is the market leader in inverters for solar panels. An inverter is the “brains” of the solar panel, transforming the direct current (DC) power into alternating current (AC). SolarEdge’s innovative inverter business has grown twice as fast as the industry over the past five years. Enphase Energy (ENPH) is another company that makes inverters for solar panels.
Chinese solar panel-maker JinkoSolar (JKS) is the largest solar panel manufacturer globally. Backed by the Chinese government, Chinese manufacturers have been cost-competitive, dominating the solar market over the past decade.
You can also look at residential solar companies like Sunnova Energy International (NOVA) and Sunrun (RUN). These companies install rooftop solar panels in people’s homes. Sunrun has become the market leader in residential solar after acquiring Vivint Solar in 2020.
Interest in solar installations has increased in two key markets, California and Texas, after devastating wildfires in California and power outages in Texas. But both stocks have been very volatile.
🔔 Curious about other sustainable ETFs? Read our ETF investing guide.