ETF Expert Corner

Guggenheim’s Bill Belden Spotlights Solar ETF (TAN)

November 21st, 2017 by ETF Store Staff

Bill Belden, Head of ETF Business Development at Guggenheim, spotlights the Guggenheim Solar ETF (TAN).


You can listen to our interview with Bill Belden by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we're spotlighting this week is the Guggenheim Solar ETF, ticker symbol TAN, one of my all-time favorite ticker symbols. Joining us via phone from Chicago to discuss this ETF is Bill Belden, Head of ETF Business Development at Guggenheim. Bill, great to have you back on the program.

Bill Belden: Hey, it's always great to be with you. Thanks for having me.

Nate Geraci: Bill, let's just dive right in here. The Guggenheim Solar ETF holds 25 to 30 stocks of companies within various segments of the solar power industry. Take us from there. How is this ETF constructed and what are some of the more noteworthy aspects of this ETF?

Bill Belden: Sure. The Guggenheim Solar ETF is an index tracking product. It's designed to track the performance of an underlying index. The name of that index is the MAC Global Solar Energy Index. We partnered with MAC in the development of the product that underlies or rather that tracks that underlying index. Really, when you think about the construction of the ETF, you have to look to the index methodology itself. I think there's a couple of important attributes or characteristics of the index to keep in mind. Really, the index is designed to provide as pure exposure to the solar industry as possible. Therefore, if you look into that methodology, it identifies companies that are participating within solar. There's a number of different ways in which companies do derive revenue or participate in the solar industry. You can be an equipment producer. You could be a materials or service supplier to those producers. You could work on the installation and the implementation side of things as well as financing those activities, or you could be a seller of solar power. There is quite a vertical, if you will, of activities that occur in support of the solar industry from development and manufacturing to getting solar panels produced and installed on companies and in homes. Basically, you identify those companies that are deriving the bulk of their revenue from the solar industry and each one of those gets a score, based upon the degree to which they are, in fact, participating. You either get a one or you get a .5, depending upon how much of your business model is derived from solar industry. That scoring methodology really again emphasizes the purity of the solar index, if you will. Beyond that, the companies are then put through a modified market cap weighting, so the higher weightings are for those that are pure plays and the lower weightings are for those that get less of their revenue from solar. If you have less than a third of your revenue, you're actually eliminated from consideration. There are a couple of other aspects. You have to be of a certain size. You have to trade to a certain degree to make sure that the product has sufficient liquidity. There are caps on the size of the position so no name would have any more than 20% at a rebalance to help keep some concentration minimized and there's some diversification controls as well. That index is reconstituted and rebalanced on a quarterly basis. The fund is designed to track that index. The other thing that I would say about it, Nate, that I think is critical to understand is that it truly is global in nature. The solar industry really is a global pursuit, if you will, and obviously there are a number of underpinnings that really drive that, of course, not the least of which is the price of fossil fuel and energy sources. Then, secondly, and perhaps certainly growing in importance, is the focus on global warming, climate change if you will, and finding alternate sources to drive power beyond those that are driven by fossil fuels. If you look at the constitution of the product, you'll see that it's fairly broad in terms of its geographic exposure. The largest weightings are for companies that are domiciled in the US. We have about 45% there. Then, not surprisingly, China. If you consider China, both mainland and Hong Kong, at about 37%, but we also have names in Switzerland, Norway, and Germany as well. It is fairly diverse in many of the developed regions of the globe. The companies have to be domiciled in a developed market, but the issuers of the securities could be emerging market as well.

Nate Geraci: Bill, currently, the top two holdings in this ETF are GCL Poly Energy Holdings and First Solar, each at around 12% of this ETF’s assets. To give our listeners a better flavor here, can you just explain high level what these two companies do?

Bill Belden: Yeah, absolutely. The first one, GCL Poly Energy Holdings, currently at about 12-1/4% weighting in the fund, is China's largest producer of polysilicon, which is the raw material used to make photovoltaic or PV cells. When I talk about the vertical, if you will, of participants in the business, they're on the leading edge of that in terms of the beginning of that process. That polysilicon production really is the primary driver of their revenue, but they also operate about 20 power plants in China, which account for about a third of their revenues and nearly all of those are solar power plants. Secondly, First Solar is a domestic US company. It designs and manufacturers solar modules. It takes many of the inputs, if you will, that are produced by a company like Poly Energy and puts those into solar panels. Basically, that's again one rung up, if you will, along that production line from within the production to delivery to installation to operation and management that's required to, again, get solar established on any individual project.

Nate Geraci: Bill, you mentioned this ETF offers broad geographic exposure, but with only 27 or so holdings, obviously, this is a highly concentrated portfolio. Is that by design or are there just not that many investible companies in the solar energy space?

Bill Belden: I think part of it, Nate, is what I mentioned before, which is the focus on the purity of the exposure to solar. I think that there are a number of companies that go beyond those in the fund that have some degree of their business that's allocated or dedicated to the solar energy. As I noted, you have to have a third of your revenues as a company derived from solar to even get considered for inclusion or a weighting within the underlying index and correspondingly, the funds. You do get a degree of concentration there. You're right, with 27 holdings, it can be fairly concentrated. I did note earlier that we have some limitations or the index has some limitations on the maximum position size to control that to some degree, but nonetheless, it historically has been relatively concentrated. There's also a number, frankly, there's a lot of M&A activity that happens within solar. It still is a relatively nascent industry. It's been around for a while, but in terms of real growth, it's really only getting a lot of expansion from the number of participants that rise to a level that's required to be included in the index. I think it is that pure play focus that points to the relatively fewer number of holdings.

Jason Lank: Bill, this is Jason Lank. A follow-up question there. It is a concentrated fund and perhaps the index does have some limitations in terms of sizing of positions. The average market cap size of the holdings is 1.6 billion. In the world of investing, that's a pretty small number.

Bill Belden: It is.

Jason Lank: Are there any capacity constraints here? This fund has blown out 2017 year-to-date, and that attracts a lot of attention, performs chasers and everyone else, you've got a concentrated holding, small companies, great performance. Could too much money come gushing into Guggenheim? Is that a problem?

Bill Belden: I think it's a good problem to have from our perceptive.

Nate Geraci: Right.

Bill Belden: It certainly is a consideration. I would be the first to point out, I developed this product back in 2008, rather. We're coming up on ten years. If you look at that history, it's been a very volatile space, to say the least. We want to make sure that investors are very mindful of the risks that are associated with investing in companies that are dedicated to the solar industry. While we have seen some volatility and some movement, I think that overall, again, this product is $400,000,000. Even in the space or the realm of small cap indexes or small cap products, it's still relatively small and I think has a meaningful amount of upside opportunity. Nonetheless, again, we see companies coming into and moving out of the index with some degree of frequency. Again, that speaks to some of the risk/reward metrics that go into participating in the solar industry. You mentioned, Jason, that 2017's been a great year for TAN, up over 50%, so far, year-to-date, but again, we've had years where it's been down fairly dramatically too. I think you just need to be mindful of what's happening there, but the space itself is growing. The number of industry participants is actually growing. We would expect again over the longer term, that the industry is going to continue to grow, not just in terms of participants but overall market cap too.

Nate Geraci: Our guest is Bill Belden, Head of ETF Business Development at Guggenheim. We're spotlighting the Guggenheim Solar ETF, ticker symbol TAN. Bill, we only have about three minutes left here. In talking about performance, as you mentioned, TAN is up nearly 50% or over 50% year-to-date. It was up over 10% just in October alone. What have been some of the drivers here?

Bill Belden: Well there are, I think, some important drivers. One is if you look at the space a year ago, Nate, I think you saw that with the Trump administration, being the election favoring Trump, and a lot of his emphasis on salvaging the fossil fuel business, particularly coal. It was a signal that bad things were in store for alternative energy providers like solar. In fact, I think some of that negativity overshot the reality of what's transpired since then. While there have been some headlines like the US pulling out of the Paris Climate Agreement or a little bit of a reduction in regulation coming out of the EPA, in many instances, those changes haven't been as collectively dramatic as some people expected. I think that that's helped contribute to more favorable views on alternative energy sources like solar throughout much of 2017. I do think that there's one driver that's important to be cognizant of right now, which has gotten some attention, which is the Suniva Trade case. There is a case in front of the Trump administration right now that came out of the International Trade Commission from a company called Suniva that filed for bankruptcy earlier this year. Basically, they were making the claim that they were impacted negatively by price subsidies from foreign producers. Again, we're very familiar with the Trump administration's discussions around being a little more restrictive on foreign trade and the prospect of potentially introducing some tariffs coming out of foreign countries, namely, China. There actually is this case in front of the Trump administration, who's due to deliver a verdict on what potential tariffs may be applied to foreign imports coming out of largely China, primarily. That's due in January. There's been some reporting that's been actually going on as people are accumulating some of the inputs that go into solar production and implementation, which I think has driven up some attention. While much of the development has, once again, focused on the downside of it, some of the verdict or some of the results that came out of the trade case, have pointed to a less impactful outcome as it relates to a potential tariff being applied. I think people need to keep their eyes on that Suniva petition because that may have an impact on at least the pace of adoption, if not the cost of adoption of solar as we move into 2018.

Nate Geraci: With that Bill, we are out of time. We'll have to leave it there. As always, really appreciate you joining us on the program. Excellent insight. Happy Thanksgiving to you and your family. Thank you.

Bill Belden: Happy Thanksgiving to you, Nate. Thank you, Jason, as well. Take care.

Nate Geraci: That was Bill Belden, Head of ETF Business Development at Guggenheim. The ETF is the Guggenheim Solar ETF. Ticker symbol TAN.