Why Clouds Could Emerge For The Solar ETF

Though its off more than 11% from its recently set 52-week high, the Invesco Solar ETF TAN is still up nearly 55% year to date, easily making it one of 2019's best-performing non-leveraged exchange traded funds.

While TAN's 2019 showing is undoubtedly impressive, the fund is losing some of its shine as nearly all of the aforementioned 11% decline from the 52-week has been accrued over the past month. Now, some analysts are growing bearish on the solar sector heading into year-end and into 2020.

As Benzinga reported Tuesday, GLJ Research's Gordon Johnson recently waxed bearish on the solar sector, Chinese stocks in particular.

See Also: Analyst: Dim Outlook For Solar Sector In 2020

Why It's Important

“In short, based on our checks this morning in China, we believe weaker-than-expected module shipments are likely the reason for Longi's (large) 3Q19 earnings miss,” Johnson said in a note out last week.

Weakness in Chinese solar names is relevant to TAN, which tracks the MAC Global Solar Energy Index, because the $433 million ETF allocates nearly a quarter of its weight to Chinese stocks. That's the fund's second-largest geographic exposure behind the 47.30% devoted to American solar companies.

Much of the forecast weakness in Chinese solar stocks is focused on small-cap names, but that's still pertinent to TAN because the ETF's 22 holdings have an average market capitalization of $2.39 billion and nearly 23% of those names are classified as small-cap growth stocks. Another 35.70% are small-cap blend or value names.

What's Next

GLJ's Johnson said Chinese solar demand could disappoint next year, which is rough outlook because the country, desperate to reduce its pollution footprint, accounts for nearly half of global solar demand.

While many American solar firms are not heavily reliant on China, erosion in the solar industry there could put some burden on U.S. solar names to pick up the slack. It's possible that could happen by way of ongoing corporate adoption of green energy solutions, but that may not be enough to stem a tide of 2020 sluggishness in Chinese solar equities.