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Is the Future Clouded for Solar ETFs?

A lot is being said about the future of solar companies with one stalwart, SunEdison Inc. (SUNE), rumored to be going bankrupt. In fact, shares of the company tumbled almost 45% in Friday’s after hours trading. The company has been on a southward trend for some time now. The company’s market value has dropped to a mere $136 million as compared to July last year, when it was valued at almost $10 billion (read: Solar ETFs to Shine in 2016?).
Per The Wall Street Journal report, SunEdison is expected to file for bankruptcy in the coming weeks. The report goes on to say that with the company preparing chapter 11 filing and in talks with creditor groups, it is likely that creditors will take control of the company and its power projects. SunEdison is already facing probes by Securities and Exchange Commission and Justice Department. Meanwhile, one of its two yieldcos, TerraForm Global Inc. (GLBL), has warned that the company is at a “substantial risk” of bankruptcy.
If the bankruptcy is announced, it could create a ripple effect in the solar industry and the entire alternative energy space. Detractors of the solar industry argue that with expensive solar panels and heavy reliance on government for subsidies, SunEdison could be the first company to fall in a series of dominoes.
However, the reason behind SunEdison’s fall is primarily its high debt. It is to be noted that SunEdison has been struggling to finance its projects due to high debt incurred as a result of a string of buyouts, including First Wind and Solar Grid Storage. It turned worse last July when SunEdison entered into a definitive agreement to acquire Vivint Solar in a cash-stock deal worth $2.2 billion. The deal made investors increasingly cautious about its rising debt pressure. These acquisitions, once believed to be strategic, are burning a hole in the company’s pocket. Thanks to these acquisitions, at the end of September 2015, SunEdison’s balance sheet had long-term debt spiraling to $9.8 billion, as per SEC filing.  
These are company specific issues and don’t show the true picture of the industry at large. In fact, other companies belonging to this industry, like SunPower Corporation (SPWR) and First Solar, Inc. (FSLR), are doing well and did not over-leverage their businesses. Additionally, with SunEdison, a large competitor out of the way, it would easier for these companies to win projects (read: Alternative ETFs to Gain on First Solar Q4 Beat).
The solar industry has a well-developed infrastructure, greater efficiencies, and a growing customer base. In fact, boosting solar capacity features high on the Democratic presidential hopeful Hillary Clinton‘s agenda (read: Trump, Clinton Race Ahead: ETFs in Contest).
Last year, the U.S. government approved of a five-year extension of the Investment Tax Credit and Production Tax Credit for solar and wind companies (read: Solar ETFs Soar on Tax Credit Extension).
With global warming issues gaining momentum and several countries working on renewable sources and efficient alternative energy application, solar companies are here to stay. Below we highlight two solar ETFs which could be game changers in the coming days.
Guggenheim Solar ETF (TAN)
This ETF tracks the MAC Global Solar Energy Index. Holding 29 stocks in the basket, the fund is concentrated in the top three firms that combined to make up for 21.9% share. Other firms hold no more than 6% of assets. American firms dominate the fund’s portfolio with about 55.9% share, followed by China (17.9%) and Hong Kong (15%). The product has amassed $228.3 million in its asset base and trades in volume of around 183,000 shares a day. It charges investors 70 bps in fees per year. The fund has lost 26.1% so far this year (as of April 1, 2016). It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (see: all the Alternative Energy ETFs here).
Market Vectors Solar Energy ETF (KWT)
This fund manages $14.5 million in its asset base and provides global exposure to 29 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 30.8% and 27.6% allocation, respectively, closely followed by Taiwan (19%). Top 10 securities hold more than 61% of the fund’s asset. The product has an expense ratio of 0.65% and sees paltry volume of about 2,000 shares a day. The ETF is off 21.8% so far this year.
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SUNEDISON INC (SUNE): Free Stock Analysis Report
TERRAFORM GLBL (GLBL): Free Stock Analysis Report
SUNPOWER CORP-A (SPWR): Free Stock Analysis Report
FIRST SOLAR INC (FSLR): Free Stock Analysis Report
GUGG-SOLAR (TAN): ETF Research Reports
MKT VEC SOLAR (KWT): ETF Research Reports
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