New Claymore ETF Sheds Some Light On Solar Energy
Written by Heather Bell
Tuesday, 15 April 2008 08:18
Claymore Securities again broke new ground this morning with the launch of the Claymore/MAC Global Solar Energy Index ETF. The fund is the first exchange-traded fund to focus exclusively on companies operating in the solar energy space. It is listed on the NYSE Arca exchange under the amusingly memorable ticker “TAN.”
“The availability of this product acknowledges the maturing of the solar energy industry and investor interest in funding solar power development,” said Claymore’s president, Christian Magoon.
Solar energy, long ignored, is now a hot topic as energy costs continue to rise and concerns about the negative effects of fossil fuel use grow. A recent HardAssetsInvestor.com article by Eli Neusner quoted a study that had found that venture capital investment in the solar energy industry grew from $150 million in 2005 to more than $1 billion in 2007. The same article also noted that new legislation could redistribute substantial subsidies to the wind and solar energy industries that had previously been awarded to the oil industry.
Magoon pointed out that all three of the major candidates in the presidential race – John McCain, Barack Obama and Hillary Rodham Clinton – are concerned about global warming and are supporters of alternative energy. The next administration is likely to be very friendly toward the solar energy industry.
Magoon also cited an interesting statistic in “Profiting From Clean Energy,” a new book by Melvin & Co. Research Director Richard Asplund, that the energy from the sun that reaches the earth in one day could meet the energy needs of the world population for 27 years. Solar energy currently provides less than 1% of global electricity.
“You could see massive 50% or 60% annual growth rates for many years before solar energy would even be at a quarter of the world’s electricity,” Magoon said.
TAN tracks the MAC Global Solar Energy Index, an index of 25 stocks, many of which are pure plays. The index was developed by MAC Indexing LLC which is an affiliate of Melvin & Co, a research firm specializing in clean energy. The index has a strong growth tilt and is more than 75% international, according to Magoon, although eligible components must be listed on a developed exchange. The companies fall mainly into the areas of equipment producers, materials producers and service providers.
Magoon said there are only about 200 publicly traded companies that have interests in solar energy worldwide, so the selection pool is somewhat limited. Nonetheless, the index’s selection and weighting methodologies show a strong preference for pure-play companies, which MAC defines as companies deriving two-thirds or more of their revenues from solar energy. Companies deriving less than one-third of their revenues from solar energy are excluded from the index entirely. Currently, almost all of the components are classified as pure plays. Pure-play companies receive higher weightings within the index, but weightings are further adjusted to ensure the index complies with 1940 Act diversification regulations.
The current component list has a combined market capitalization of $95 billion, ranging in size from $250 million – which is actually the minimum threshold for inclusion – to $18 billion, Magoon said. Large-cap stocks represent 27% of the index, while mid caps have a 29% weighting and small caps have a 42% weighting.
Among the top 10 components are First Solar Inc., Renewable Energy Corp., Suntech Power Holdings Co., and SolarWorld AG. Europe dominates the index, with a 29% weighting for Germany, Norway at 7%, Spain at 4% and Switzerland at 3%. China is 29% of the index, and the U.S. has a weighting of 26%.
Importantly, almost all of the companies are also profitable, belying what Magoon says is a common misconception that the solar energy industry does not make money. In fact, 20 of the index’s components were profitable in 2007.
He added that the companies within the index tend to be fairly volatile and heavily traded. They also face unique risks relating to solar technology and government subsidies. However, their prospects are strong, with demand for materials currently outstripping supply – a further sign of the changing attitudes toward alternative energy.
TAN offers an interesting diversification play in the energy space: Besides spanning a variety of size segments and several countries, it also offers diversification away from the ever-dominant oil industry. Magoon noted that a recent study from Melvin found that there was not much correlation between crude oil prices and solar energy because currently solar energy is used mainly to generate electricity, while much of global oil production is ultimately used for transportation.
“The outputs are used for different things,” Magoon said.
Although Claymore is clearly a first-mover in the space, Van Eck currently has its own solar energy ETF in registration, so TAN may see some competition soon.
TAN charges an expense ratio of 65 basis points.
Top 10 Companies Weight
FIRST SOLAR INC 8.77%
RENEWABLE ENERGY CORP AS 7.45%
Q-CELLS AG 6.44%
SUNTECH POWER HOLDINGS ADR 6.19%
JA SOLAR HOLDINGS CO LTD 5.25%
SOLARWORLD AG 5.24%
SUNPOWER CORP-A 4.95%
LDK SOLAR CO LTD-ADR 4.74%
MEMC ELECTRONIC MATERIALS INC 4.68%
YINGLI GREEN ENERGY – ADR 4.32%