Why the Invesco Solar ETF is shining bright

The Invesco Solar ETF [TAN] has burned brightly this year, accelerated by interest in renewable energy during the coronavirus pandemic. The fund started the year at $31.94 and — barring a small dip in March — continued a strong performance to reach $75.66 on 9 October. Will a growing belief in green policies keep the Invesco Solar ETF rally going?

Following its steady gains throughout the year, the Invesco Solar ETF is up 136.8% for the year to date through 9 October. It has a daily return of 145.92% for the year so far and net assets of $632.42m.

Investors have been impressed by the stellar performance of a number of the ETF’s major solar holdings, which themselves have been exhibiting some powerful performances.

The stocks behind Invesco Solar ETF’s rise

Invesco first launched the TAN ETF in April 2008. The fund was designed to track the MAC Global Solar Energy Index, which is comprised of companies that derive a significant amount of their revenues from the solar industry, such as solar power equipment producers.

Israel based SolarEdge Technologies [SEDG], a solar parts manufacturer, is the fund’s top holding at 11.57%, alongside Enphase Energy [ENPH], a US solar energy technology group, at 9.57%.

Chinese solar glass manufacturer Xinyi Solar Holdings [0968.HK] has the third largest weighting at 7.36%, followed by US power plant operator First Solar [FSLR] at 6.47% and Chinese based solar panel manufacturer JinkoSolar [JKS] at 5.54%.

SolarEdge Technologies share price has tripled so far this year, rallying from $101.81 at the start of January to as high as $305.35 as of 9 October. The stock was boosted in February after it secured a contract with Enfindus to supply inverters and power optimisers for 1 gigawatt (GW) of commercial and industrial rooftop photovoltaic systems.

The company posted second quarter revenues of $331.9m, up 2% on the same quarter last year and GAAP net income of $36.7m, which was also up 11% year-over-year.

Meanwhile, shares in Xinyi Solar have more than doubled so far in 2020, from HK$5.59 on 2 January to HK$13.38 on 12 October.

Such outperformance has also been seen in Enphase Energy’s share price, which soared 272.1%to $109.18 in the same period. Shares in First Solar, meanwhile, are up from 37.7% to $78.81.

The investment case for solar

Solar energy is seen as a booming market with plenty of growth potential.

In 2019, according to a Solar Power Europe report, 16.7 GW of installations were added in Europe, up from 8.2 GW in 2018. It is set to reach 21 GW by the end of the year, which would put it on track to hit 21.9 GW in 2021.

According to Fitch Solutions, solar capacity is set to overtake wind by 2021, growing at an average annual rate of 9.8%.

Solar is increasingly becoming the renewable energy of choice given the higher cost of offshore wind and the regulatory issues around onshore wind plants.

Another recent tailwind has come from polls suggesting a victory for Joe Biden in the upcoming US presidential election. A great many also hope for a Democrat majority in the Senate and House of Representatives. A Biden administration has already pledged to be renewable energy friendly, aiming to spend $2trn to combat climate change.

“As investors digest a greater likelihood of a clean-energy-friendly Biden administration, demand for solar and other alternative energy has increased,” Todd Rosenbluth, head of ETF and mutual fund research for CFRA Research, told Bloomberg. “TAN is the largest solar ETF and has benefited from growing liquidity.”

Nations elsewhere, such as Germany, are also ramping up renewable energy targets and accelerating installations as societies, companies and economies seek a cleaner world in response to the pandemic. Less polluted skies and waterways during lockdown remain some of the most powerful images from the crisis.

There are words of caution, however.

Given the number of recent short-term traders in the TAN ETF, investors should expect wild price swings and “some type of” pullback in the near future “that could last a few weeks or months”, Chris Vermeulen wrote in FX Empire.

A Trump victory in November could stymie investment hopes and a recession could also dampen demand for residential solar panels.

But, given the momentum behind the industry, the sun is forecast to keep shining on Invesco’s Solar ETF, at least for now.