INVESCO EXCHANG/SOLAR ETF (NYSEARCA: TAN) is a solid long-term investment in a basket of companies focused on renewable energy, with a large concentration in solar energy. While people typically think of ETFs as stable investments, $TAN is a bit edgier and riskier. $TAN is heavily weighted towards smaller companies that have a lot of growth momentum, which comes with both advantages and disadvantages. $TAN companies typically have lower quality balance sheets (e.g., more debt and/or less cash) and higher volatility. However, because of society’s broad movement towards sustainability and combating climate change, we believe $TAN has significant growth potential in the future and is worth investing in, given risk will be diversified as it is an ETF.
Market conditions are positioning renewable energy to take a huge leap forward as oil companies continue to struggle. Right now oil companies are scaling back production to keep oil prices at valuable levels. Last month we saw oil prices go negative due to significant drawbacks in demand from COVID and oversupply by Russian and Saudi facilities. This difficult situation creates an opportunity for renewable energy companies to push forward as an alternative energy source. This is likely why $TAN has had such a strong recovery since the initial COVID market drop in March.
The largest company in $TAN has experienced >400% growth in stock price in the past 5 years. Solaredge Technologies ($SEDG) makes up >10% of $TAN and has helped drive $TAN value over the years. $SEDG is up >400% in share price in the past 5 years and is well positioned for further growth. We took a look at $SEDG's 10-K and it's quite impressive, with revenue growing at 50% per year and profits growing at nearly the same rate. Of course, it's important to look at other companies in $TAN, but the lead company seems to be doing well.
However, >50% of $TAN consists of smaller companies with market caps between $600M - $2.7B, so it's a relatively risky ETF. The majority of companies in $TAN are small-cap companies that may offer significant upside but with significant risks associated, as small cap stocks generally experience more volatility. However, because $TAN is an ETF, the risk is more dispersed.