S olar stocks delivered turbocharged gains to ETF investors this week after congressional leaders reached a key energy pact. That move also helpedTesla Motors ( TSLA ) stock hit top gear.
It's been a tough slog for clean energy exchange traded funds for much of this year, but the clouds may be starting to dispel.
The legislative pact would extend a key solar subsidy for several more years. Without that support, a steep fall in demand for solar and wind energy was likely.
"The prospects (for solar) remain strong, particularly in light of pending legislation that we view favorably," Todd Rosenbluth, director of ETF research for S&P Capital IQ, wrote in a Dec. 16 note.
Year to date through Dec. 16, TAN was down 6.6%.
PowerShares WilderHill Clean Energy ( PBW ) jumped 7% Wednesday, but has given up 8.7% in 2015.
The biggest holding in PBW isHanwha Q Cells (HQCL), which tops IBD's solar energy industry group with a Composite Rating of 93.
The PowerShares ETF also counts Tesla as a top-25 holding.
The solar tax credit extension is expected to benefit the electric car maker's Powerwall home battery unit. The batteries charge using solar electricity.
In fact, Tesla CEO Elon Musk chairs SolarCity, the No. 1 residential solar panel installer.
Not All Bright
Investors in solar ETFs also cheered other news this month.
A historic U.N. climate change deal in Paris Dec. 12 is seen as a big positive for clean energy firms and negative for the fossil fuel industry.
However, challenges still loom, say market analysts.
Growth's decelerating as the industry matures after eight years of high installation levels, says equity analyst Angelo Zino of S&P Capital IQ. The solar industry is well off its 2008-09 highs. TAN traded for 279.20 in 2008, while a share is valued at roughly 32 today.
Solar stocks are also vulnerable in an oil price rout, although the relationship between the two asset classes is not entirely clear-cut.
Moreover, the threat of higher interest rates crimped expansion plans in 2015. And utility companies are nurturing their own solar projects.
Amid stiff industry competition, pricing for new solar systems is expected to decline in 2016.
However, Zino points out that the recent accords on Capitol Hill and in Paris will do much to alleviate at least the political and macroeconomic risks for solar stocks.
The industry's recent momentum is evident too. Solar energy sits at 128 among 197 industry groups ranked by IBD, up from 175 a week ago and 191 a month ago.
So TAN and its peerMarket Vectors Solar Energy (KWT) could pay off as tactical high-risk, high-reward bets for successful investing .
Solar companies' positive long-term outlook may also make TAN and KWT worthy satellite positions in a strategic portfolio.
TAN produced an annual average 10% gain over the past five years. So far in 2015, it has absorbed $15.7 million in new investor money.
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