How to Invest in Solar Stocks After Hanergy
Up until now, investing in the Guggenheim Solar ETF (NYSEARCA:TAN) seemed like the perfect way to get some diversified pure play exposure to the rapidly growing solar industry. Out of the two ETFs available, TAN seems to be the most liquid and transparent. Then in May of this year, Chinese company Hanergy Thin Film dropped -47% percent after a +500% increase in the past year alone. This sudden drop triggered a one-day drop in the price of TAN by -7.8%. It turns out that Hanergy was the biggest holding in the TAN ETF at around 11% before the drop. As regulators start to investigate and the stock remains suspended, Guggenheim liquidated Hanergy on the OTC market and incurred some significant losses as a result. However, this begs the question of just how many other Chinese solar companies have skeletons in the closet that investors should be worried about.
One way to protect against similar losses would be to invest only in solar companies that are traded on major U.S. exchanges. The Guggenheim Solar ETF is built on the underlying MAC Solar Index which is transparent about their holdings which currently sit at 26 constituents. If we select all stocks that are not traded on major U.S. exchanges, we get the following list:
|GCL-Poly Energy Holdings Ltd.||3800:HK||Hong Kong|
|Xinyi Solar Holdings Ltd||968:HK||Hong Kong|
|Meyer Burger Technology AG||MBTN:SW||SWX Elec|
|Shunfeng Photovoltaic International Ltd||1165:HK||Hong Kong|
|REC Silicon ASA||REC:NO||Oslo|
|China Singyes Solar Technologies Holdings Ltd.||750:HK||Hong Kong|
|SMA Solar Technology AG||S92:GR||Xetra|
|Comtec Solar Systems Group Ltd.||712:HK||Hong Kong|
If we drop these stocks, this leaves us with 18 stocks remaining. Of the remaining U.S traded stocks, 2 constituents are not considered pure plays according to the index provider:
|Advanced Energy Industries||AEIS:US||NYSE|
|Abengoa Yield PLC||ABY:US||Nasdaq|
If we drop these two names, that leaves us with 16 remaining stocks. Now the question becomes how to weight these stocks. We don’t have enough stocks in this portfolio to apply a 10/40 balancing strategy. If we do a market cap weighting “as is” , Sun Edison takes a +25% in the portfolio. If we then set a rule that no single stock can exceed +20% of the portfolio then this is what the weighting would look like:
This capped market cap weighting measure helps ensure diversification but at the same time lets the winners run and the larger companies with economies of scale occupy heavier weighted positions. We can then see that a majority of weight is on the larger market cap U.S. based companies and the remaining balance is very diversified across the various Chinese solar companies that occupy the portfolio.
If you want to invest in this portfolio, here’s what you can do. Join Motif Investing for Free! and then buy the “Nanalyze Solar Stocks” motif. While the cost per trade or rebalance is $9.95, you don’t have to pay TAN’s .75% annual expense ratio. For a $5,000 position in TAN, this would work out to about $37.50 per year. That would more than cover the purchase of the Nanalyze Solar Stocks motif and the twice a year re-balancing if you chose to rebalance your portfolio when we re-balance ours. Alternatively, you can just create your own Solar motif then share it with us.
Most importantly, you would have concentrated your solar in U.S. companies that are global leaders in solar while also taking diversified bets in some of the smaller Chinese players that are traded here in the U.S as American Depository Shares (ADSs). And you wouldn’t need to worry about Hanergy because you would have never held it in the first place.
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