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Summary The top holdings in the portfolio are good companies with decent performances. The ETFs have considerably reduced their Chinese market exposure to tide the current downturn. The solar industry is set to grow at a rapid pace. I was sceptical about investing in solar ETFs earlier, mainly because of the fact that they included Hanergy Thin Film Power Group Ltd. (OTC: HNGSF ) among their top holdings. Since the Hanergy bubble has burst, the two ETFs have now minimized their exposure in that stock. The Guggenheim Solar ETF (NYSEARCA: TAN ) and the Market Vector ETF (NYSEARCA: KWT ) have also considerably reduced their exposure to Chinese stocks to avoid volatility. I think it should be a good opportunity to invest in these ETFs now, as they have increased their exposure to top quality solar stocks. The solar industry being a relatively new industry sees rapid changes in business models and technology – top companies (e.g. Hanwha Q Cells (NASDAQ: HQCL ) ) can go bankrupt in a matter of months due to changes in the supply chain/technology. Solar ETFs are a better way for retail investors to stay invested in the volatile solar industry to avoid company specific risks. They can also take advantage of the long term double digit secular growth of the industry using these ETFs. Top Holdings Then & Now – Portfolio looks decent now TAN Top Holdings As on 24th Apr-2015 29th Sep-2015 Hanergy Thin Film Power Group 11.45% – SunEdison Inc. (NYSE: SUNE ) 8.43% 5.15% First Solar Inc. (NASDAQ: FSLR ) 6.99% 8.06% GCL-Poly Energy Holdings LTD (OTCPK: GCPEF ) 6.45% 7.52% SolarCity Corp. (NASDAQ: SCTY ) 6.27% 7.01% SunPower Corp. (NASDAQ: SPWR ) 4.56% 5.01% Terraform Power Inc – A (NASDAQ: TERP ) 4.39% 4.27% Canadian Solar Inc. (NASDAQ: CSIQ ) 4.35% 4.22% Xinyi Solar Holdings LTD. 4.17% 5.88% Trina Solar LTD. (NYSE: TSL ) 3.93% 4.86% SMA Solar Technology (OTCPK: SMTGF ) – 4.19% Source: Guggenheim Solar ETF KWT Top Holdings As on 24th Apr-2015 31st Aug-2015 Hanergy Thin Film Power Group 8.16% – SunEdison Inc. 8.03% 4.06% First Solar Inc. 6.85% 8.90% SolarCity Corp. 6.46% 8.84% GCL-Poly Energy Holdings LTD 6.13% 5.66% Terraform Power Inc. – A 5.62% 6.91 Shunfeng International Clean Energy Ltd (OTCPK: SHUNF ) 5.32% – Trina Solar LTD. 4.71% 4.53% SunPower Corp. 4.65% 4.97% Canadian Solar Inc. 4.56% 3.72% Sino-American Silicon Products Inc. 4.11% – Xinyi Solar Holdings LTD. 3.10% 5.35% SMA Solar Technology – 4.85% Source: Van Eck Global Both the ETFs have removed Hanergy Thin Film from their respective portfolios. This is in line with my thoughts expressed earlier, that when the Hanergy bubble bursts – the ETFs will also suffer. Reducing exposure in the Chinese market makes sense now The ETFs had a considerable exposure in the Chinese market which made them vulnerable to low returns at the time of crisis. However, both the ETFs have reduced a considerable amount of their exposure in the Chinese market. KWT’s exposure in the Chinese market stands at 31% from 38% previously. For TAN the Chinese presence has been reduced from 48% previously to ~38% currently. All this shows that the ETFs are trying to reduce the volatility in their returns. Though the performance was slightly below the broader Dow Jones index, it was better than most of the individual stock returns. (click to enlarge) As on 12 th Oct 2015 Source: Google Finance YTD Performance of some of the stocks as on 12th Oct 2015 SPWR -2.9% SCTY -9.2% SUNE -52% TERP -34% CSIQ -10.7% Performance was better than individual Stock returns Investors look to invest in ETFs to guard themselves from the volatility in the sector. The solar industry is volatile and is facing a downturn currently. Other than Trina Solar and First Solar stock who returned ~22% and 15% YTD (as on 12th October 2015), other stocks have been battered. Both these ETFs have also suffered due to the recent selloff seen in the broader energy market. ETFs average the returns from all the stocks for investors. The investor will not unduly suffer if his one solar stock holding is punished. The Guggenheim Solar ETF has a total asset base of $225 million with an expense ratio of 0.7% and Market Vector ETF has a total asset base of $15 million with an expense ratio of 0.65%. Solar Energy has have a very bright future Though the Chinese stock market looks weak at the current time, the Chinese solar industry has a bright solar future. It is expected that China will be the largest solar market globally. The country is expecting to install 18 GW of new capacity this year. China and other major carbon emitters such as India and Europe have to considerably reduce its carbon emissions as part of the INDC. Solar energy is expected to be the biggest source of capacity expansion among all energy sources in the next 20 years, as per major forecaster (Bloomberg and others). Global solar installation are expected to increase by 40% y/y to 55 GW and continue to increase in the double digit range in the long term as well. USA solar energy is booming as well, with 22.7 GW of total installed capacity by the end of Q2’15. Downside Risks Staying invested in the solar industry through an ETF makes more sense if the investor is not very well acquainted with the market trends. However for someone who follows the industry closely, I think a better way to stay invested should be through individual stock holdings. If an investor believes in any particular stock(s) and stays invested, he should end up making more money than the ETF. For example, Trina Solar stock was up ~22% during the time the ETFs were seeing their values decline. Conclusion Solar ETFs have also been hurt by the decline in the energy sector, even though the industry is seeing strong growth and well run companies are showing good profitability and revenue growth. Solar ETFs were a bad bet earlier because of the heavy weighting being given to highly risky companies. But they have become a better investment, with the pruning of such stocks from their portfolios. The solar industry is an extremely dynamic and volatile one. It carries both high risks and rewards and for normal investors ETFs may be a good choice to take advantage of the long term secular growth of the industry. They represent a good investment now, as they have fallen unduly due to the oil price decline. Currently, both TAN and KWT represent good investment options in my view. Scalper1 News
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