TAN vs. ICLN ETF Review: Is Targeting Solar Energy the Better Strategy?
Investing in fast-growing renewable energy technologies is potentially lucrative but also risky. Learn about two ETFs, ICLN and TAN, that approach clean energy investing in two different ways: one focused only on solar and another on investing broadly in clean energy.
David Dierking Updated March 28th, 2022
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TAN vs. ICLN: Strategy Overview
The Invesco Solar ETF (TAN) invests in companies that derive at least one-third of their revenue from solar energy. These companies can include solar panel manufacturers, material suppliers, and installers. The fund starts with a market cap weighting methodology and adjusts according to the company’s “solar exposure score.”
The iShares Global Clean Energy ETF (ICLN) invests in a global portfolio of stocks of clean energy companies, including those focused on solar, wind, and other renewable resources. It eliminates companies engaged in tobacco, weapons, coal, oil and gas exploration, and military contracting. The final portfolio of qualifying components is weighted based on a combination of market cap and clean energy exposure score. Stocks with a higher score receive greater weights in the fund.
|Fund||iShares Global Clean Energy ETF (ICLN)||Invesco Solar ETF (TAN)|
|Index||S&P Global Clean Energy Index||MAC Global Solar Energy Index|
|Weighting||Modified market cap||Tiered|
|Inception Date||June 2008||April 2008|
|Assets Under Management||$5.2bn||$2.7bn|
TAN vs. ICLN: Top holdings
There will be some overlap between the solar stocks held in the two funds, but any securities outside the solar industry should be unique to ICLN. TAN has a smaller universe of stocks to work with, which makes it a more concentrated portfolio. ICLN, while more diversified, is still top-heavy in its high conviction names. Enphase Energy, SolarEdge Technologies, and Xinyi Solar Holdings are common to both funds’ top ten holdings.
|ICLN Holdings||%||TAN Holdings||%|
|Vestas Wind Systems||8.9%||Enphase Energy||11.1%|
|Enphase Energy||7.8%||SolarEdge Technologies||10.1%|
|Consolidated Edison||5.9%||Xinyi Solar Holdings||5.8%|
|SolarEdge Technologies||5.8%||GCL-Poly Energy Holdings||5.5%|
|SSE||3.9%||Daqo New Energy||3.8%|
|EDP Energias de Portugal||3.8%||JinkoSolar Holding||3.3%|
|Xinyi Solar Holdings||2.9%||Shoals Technologies Group||2.7%|
TAN’s 10%+ weightings in Enphase and SolarEdge aren’t ideal, but they are understandable. The clean energy space has a small number of participants and even fewer major players. Both stocks offer pure exposure to this sector, although company-specific risk is high.
TAN vs. ICLN: Sector breakdown
Both TAN and ICLN fall under the “clean energy” label, but their exposures are quite different. ICLN has a heavier allocation to traditional utility and industrial names. TAN focuses on technology, including semiconductors, batteries, and solar energy storage systems.
ICLN’s focus on utilities makes it less volatile than TAN. The latter is more growth-oriented, with higher highs and lower lows.
TAN vs. ICLN: Geography breakdown
Both funds invest in stocks from around the world. They both have about one-third of assets invested in U.S. companies and the remainder invested globally. ICLN tilts more towards developed economy companies; TAN makes larger investments in emerging markets.
ICLN’s non-U.S. exposure is mostly in Europe, including Denmark, Spain, and the United Kingdom. TAN’s largest foreign investments come from China, Israel, Hong Kong, and Taiwan. These are some of the world’s biggest tech development hubs, where a lot of solar technology is being created.
TAN vs. ICLN: Holdings overlap
Given ICLN’s general industry focus and TAN’s sector-specific mandate, the overlap between the two funds isn’t high.
The overlap would be due to ICLN’s investment in solar energy as part of its overall strategy. The primary difference between the two funds is ICLN’s large investment in utility companies compared to TAN’s focus on technology.
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TAN vs. ICLN: Performance
The historical performance of these two funds demonstrates how TAN has historically been more volatile.
|3 Year (ann.)||30%||42%|
|5 Year (ann.)||21%||31%|
|10 Year (ann.)||11%||12%|
|Since inception (ann.)||-4%||-7%|
After plunging in value following their debuts during the financial crisis, both funds were flat for most of the 2010s. In 2020 when oil prices crashed during the Covid pandemic, clean energy became a hot sector again. For the full year, TAN gained 234%, and ICLN returned 142%. Since then, clean energy has cooled off, and both funds are 35% below their recent highs.
TAN vs. ICLN: Expense ratios
Funds that invest in emerging technologies tend to come with higher expense ratios. Clean energy falls into that category. Both funds charge high fees, but one ETF has a clear advantage.
Within clean energy ETFs, ICLN is one of the cheapest, while TAN is one of the most expensive. On the surface, a 0.24% difference in expense ratios is significant, but the wide swings in performance make this difference less meaningful.
Should you invest in ICLN or TAN?
ICLN and TAN offer very different exposures within the clean energy industry. If you’re looking for broad exposure to clean energy, ICLN would be the better choice. It encompasses solar, wind, nuclear, hydrogen, and other renewables. TAN focuses only on the solar space and provides more concentrated exposure to a subset of this sector. That can make TAN more volatile but also get you higher returns.
TAN is a better representation of the technological developments occurring in this industry. Energy production is just one aspect of this sector. TAN wins at capturing the advancements in solar-powered charging systems, energy storage, and components. It focuses on one sub-sector, whereas ICLN targets the entire clean energy sector. You’d be trading growth potential for broader diversification.
Solar is where a lot of the growth potential will be over the next decade. According to the IEA, “renewables are set to account for almost 95% of the increase in global power capacity through 2026, with solar PV alone providing more than half.” Wind and other forms of alternative energy will likely experience significant growth for the foreseeable future, but solar appears to be the industry that will see the most interest.
Because of its focus on utilities and industrials, ICLN is the more defensive ETF. Utilities are often viewed as a safer investment since consumers and businesses need electricity regardless of the market environment. TAN should be considered the tech growth play of the two.
When the economy’s expansion is the market theme, TAN could outperform. In a slowing or contracting environment, ICLN might perform better. Growth has been out of favor in 2022 as inflation soars and interest rates rise. That’s reflected in current year returns where TAN has lagged badly.
Both funds are heavily traded, so liquidity is not a concern. In isolation, ICLN is the cheaper option, but the emerging nature of the clean energy space makes this less of a consideration for investors.
💰 ICLN vs. QCLN: Takeaway
- TAN and ICLN both provide good options for investing in the clean energy space.
- Which ETF you should choose depends on whether you’re looking for the diversified, lower risk profile of ICLN or the targeted, higher growth potential profile of TAN.
🔔 See how ICLN compares to QCLN, another large clean energy ETF.
Author: David Dierking, CFA
David Dierking has been writing about investment strategies using ETFs and mutual funds since 2007. He has extensively contributed to The Street, Investopedia, Seeking Alpha, ETFdb.com, ETF Trends, and ETF Daily News. David received his BA in finance from Michigan State University. He has also been a CFA Charterholder since 2004.
NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.