Not All Clean Energy ETFs Are Created Equal

May 21, 2015 by

new etfsDavid Fabian:  Clean energy has been on fire so far this year as solar, wind, battery, and renewable fuel companies continue to make inroads against traditional oil & gas conglomerates. Companies such as Tesla Motors Inc (TSLA) are striving to make the concept of green energy available to mainstream consumers and appear to be succeeding on many fronts.

The adoption of this technology on a worldwide scale is continuing to expand at a rapid pace and investors now have many options at their disposal. While some might choose to follow a handful of individual stocks, I have found that highly liquid and diversified ETFs offer a much better view of the overall industry.

Cloudy Days For The Biggest Solar ETF

A discussion of this sector almost always starts with the Guggenheim Solar ETF (TAN), which is the largest ETF by asset size with over $450 million under management. TAN tracks 29 companies engaged in the production, installation, and fabrication of solar equipment for both residential and business use.

Top holdings in this ETF include well-known names such as Sunedison Inc (SUNE) and Solar City Corp (SCTY). However, the largest single position is in a somewhat suspect Chinese stock – Hanergy Thin Films.

Aaron Jackson, a market technician that I respect immensely, recently did some analysis of this company that pointed out various hidden dangers. Subsequently, Hanergy underwent a massive drop that significantly re-priced TAN’s net asset value amid a heavy spike in volume.

tan

The move in Hanergy is either going to trigger the company being removed altogether or rebalanced to a significantly diminished capacity in TAN. Rebalancing typically occurs at the end of the quarter, which is still several weeks away. My advice is to let the dust settle in this ETF before looking to play it in either direction. There are too many unknowns at this point to speculate on a probable outcome.

If you do decide to invest, keep in mind how swiftly these stocks can move (in both directions) and adhere to a strict sell discipline to prevent large losses.

Other Ways To Play The Clean Energy Theme

Another fund that takes a broader view of green energy is the Market Vectors Global Alternative Energy ETF (GEX). This ETF contains 30 solar, wind, battery, and industrial companies. TSLA is the top holding in GEX with nearly 12% of the total assets.

gex

This ETF has risen 18% so far in 2015 and carries a far broader exposure to foreign countries. GEX is primarily allocated to the United States with 60% of its assets, followed by China with just 12%. That heavier U.S. focus has stunted gains versus TAN this year, yet may offer a more conservative and balanced index overall.

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