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Solar ETFs Soar on Tax Credit Extension

Solar ETFs Soar on Tax Credit Extension

By Zacks Equity ResearchDecember 18, 2015 2:50 PM

Congress’ vote for an environmental tax credit extension on Wednesday helped the solar sector to register healthy gains thereafter. After getting a boost from historical Paris deal, credit extension news set the tone for the solar sector, which is on a track to finish the week on a positive note. ETFs having significant exposure to the solar energy sector are also poised to gain from this scenario.


Extension in Focus  

The legislation approves an additional five years of an investment tax credit (ITC) which will allow solar power companies to keep claiming federal ITC  at 30% of the price of solar energy systems which was set earlier to expire at the end of 2016. However, the credit will be slashed gradually to 10% in 2022. Any solar project that starts before the end of 2021 will get the benefit (read: SolarCity Sees Incredible Jump: ETFs in Focus).

Moreover, the solar sector is also poised to be benefited from the production tax credit (PTC) extension. The PTC pays 2.3 cents per kilowatt-hour of electricity generated and technically expired at 2014 end due to Congressional gridlock. It has been decided that the PTC will be extended through 2020 but will be gradually reduced over the next four years before being completely phased out (see: all the Alternative Energy ETFs here).


The environmental tax credit extension came as part of the $1.15 trillion federal spending bill which prevented a government shutdown and lifted the 40-year-old ban on exporting American crude oil. The extension initiative along with the historic Paris meet that struck a deal to limit greenhouse gas emissions and shift toward clean energy indicated that investments in clean energy sectors may prove fruitful in the near future.


What’s Store for Solar?  

It has been clearly indicated that most of the nations want the world to be free from pollution and be a better place to live in. This signals that importance and demand of clean energy including solar over fossil fuels will increase with time. The Zacks Industry Rank for Solar is #16 out of 257, also confirming the bright prospect of this sector (read: Solar ETFs to Watch Following Q3 Results).


Meanwhile, recent trends also showed growing demand of solar in the U.S. The Solar Energy Industries Association (SEIA) forecast that 2015 may prove to be a record-breaking year. Installation of 1,361 megawatt DC in the third quarter helped the market to increase installations to 4.1 gigawatt (GW) DC through the first nine months of 2015. Meanwhile, SEIA said: “the extension is likely to add another 140,000 jobs or more.”


2 Solar ETFs to Watch 

Like solar stocks, solar ETFs also got a massive boost from these developments throughout the week. In this scenario, we have highlighted two solar ETFs that are likely to remain on investors’ radar in the coming months.


Guggenheim Solar ETF (TAN)

This ETF follows the MAC Global Solar Energy Index, holding 31 stocks in the basket. American firms dominate the fund’s portfolio with nearly 50.9% share, followed by Hong Kong (19.8%) and China (17.5%). The product has amassed $290.9 million in its asset base and trades in moderate volume of around 216,000 shares a day. It charges investors 70 bps in fees per year. The fund has returned 16.8 % over the past five trading days. (read: Solar & Emerging Market: 2 ETFs Trading with Outsized Volume).

Market Vectors Solar Energy ETF (KWT)

This fund manages $18.8 million in its asset base and provides global exposure to 28 solar stocks by tracking the Market Vectors Global Solar Energy Index. In terms of country exposure, U.S. and China account for the top two countries with 27.5% and 32.9% allocation, respectively, closely followed by Taiwan (20.5%). The product has an expense ratio of 0.65% and sees paltry volume of about 2,000 shares a day. The ETF has returned 15.6 % over the past five trading days.


2015-12-22 Updated  


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