There's little doubt that solar is the future of the energy business. It's cost-effective, flexible, and environmentally friendly, checking off all of the most important proverbial boxes. That's why the U.S. Energy Information Administration predicts solar power's growth will outpace any other energy source's growth through 2050, at which time solar and wind power are projected to jointly be the nation's top sources of electricity. That's a huge opportunity.
The challenge for investors is plugging into that opportunity. There are plenty of compelling solar stocks to choose from right now. However, the industry is so young and still so fluid that it's not clear if those same companies will be as compelling -- or even be around -- in the distant future.
There's a simple solution. That is, don't even bother trying to pick one or two of these names. Buy a slice of the entire industry instead and let someone else swap out these stocks as is merited. The Invesco Solar ETF (TAN 2.46%) lets you do that.
ETFs solve a couple of key problems
If you're reading this, then you likely already know what an exchange-traded fund (or ETF) is. On the off chance you don't know, an ETF is just a basket of related stocks. In the case of the Invesco Solar ETF, the basket is of course solar-related. Owning a share of the fund means you own nearly 50 different solar names, including solar panel maker First Solar (FSLR 2.12%), power inverter outfit Enphase Energy (ENPH 3.80%), and solar panel installer SunRun (RUN 5.97%), just to name a few.
Rather than buying and selling any or all of these individual stocks, you buy and sell the entire basket. This strategy solves the overarching challenge investors face when an industry is a relatively new one. That is, it doesn't force investors to ferret out winners and laggards. Some of the fund's holdings might be duds. But more than enough of them will be winners.
To this end, although it's been far more volatile during this period, the Invesco Solar ETF's performance over the course of the past five years has trounced the performance of the S&P 500.
This comparison, however, also quietly illustrates another important aspect of how exchange-traded funds should be used. That is, these are meant to be long-term positions in obvious megatrends.
That can be a toughie for investors, many of whom may be more short-term and speculative-minded than they care to admit.
See, ETFs can be great holdings. They're not meant to be frequently traded, though ... something that's not uncommon with some of the market's hottest stocks. Fortunately, being the average price of several dozen different stocks, the Invesco Solar ETF just doesn't move fast enough or predictably enough in the short run to even try to time its ebbs and flows. This nuance helps negate the temptation to trade in and out of it too often.
The Invesco Solar ETF is in the right place at the right time
There's little doubt that solar power is a long-term megatrend worth plugging into.
As was noted, the U.S. Energy Information Administration believes solar power will account for the majority of the nation's power-production capacity growth through 2050. As of right now, wind and solar collectively meet about 15% of the nation's need for electricity (about half from each source). By 2050, however, the two renewable energy sources will jointly generate more than half of the United States' electricity, with solar making up the lion's share of that capacity growth.
Investors won't have to wait 27 years to start seeing the fruits of this growth, though. The EIA expects solar power to single-handedly account for roughly half of this year's domestic production capacity additions. Then, solar should roughly repeat the feat next year.
That outlook jibes with nearer-term outlooks from similar agencies overseas. The International Energy Agency expects worldwide solar power production capacity to nearly triple from 2022's output by 2027. Industry association Solar Power Europe notes that the continent's capacity to generate electricity with solar power should more than double between early 2022's output and 2025, making it the single-fastest growing source of power in the region. That's huge.
The only question is: Which solar stocks are best positioned to capitalize on that growth? It's hard to say. With the Invesco Solar ETF, you don't have to say.
Bottom line: There's a time to pick individual stocks. There's also a time to specifically not pick individual stocks and step into a sociocultural movement instead. Smart investors are willing and able to know the difference and act accordingly.
