A $2bn solar ETF surges on ‘Blue Wave’ bets

Investors flock to shares of US clean energy and infrastructure companies on possible Biden win

Solar panels in New York. Shares of renewable energy companies expected to benefit from Joe Biden’s energy policy plans have surged. AP

As US stocks rallied on Wednesday, one area of the market deemed sensitive to Joe Biden’s election chances absolutely took off.

Shares of renewable energy companies expected to benefit from Mr Biden’s energy policy plans surged, continuing a trend of outperforming the broader market as the Democrat’s chances to win steadily improve.

The $2 billion Invesco Solar ETF climbed 5.4 per cent, extending a six-day rally to 20 per cent. The S&P 500 is up just 2.5 per cent in that span. Options traders have piled into the exchange-traded fund, with a record 17,000 calls changing hands on Tuesday.

NextEra Energy, the largest renewable supplier, closed with a higher market valuation than Exxon Mobil.

Day traders have also jumped on the bandwagon. A list of the top 10 “buys” among online traders tracked by Fidelity Investments on Wednesday showed that three of them are renewable energy companies – Sunworks, Ocean Power Technologies and Westwater Resources.

Another stock in that ranking is American Resources, which supplies materials for infrastructure – an industry also seen as a beneficiary of a potential fiscal boost.

The latest buying frenzy followed Mr Biden’s first debate with President Donald Trump last week. Since then, the contender’s lead has widened in recent polls, an edge that’s viewed as portending a Democratic sweep of Congress as well as a potential increase in infrastructure and green energy spending.

“The infrastructure and green trade is a very ‘blue wave’ concept,” said Yousef Abbasi, global market strategist at StoneX, referring to a situation where the Democrats take control of both the White House and Congress. “The trade is very much indicating that someone believes that we’ll get the push for a Democratic Senate.”

Bets on a victory by Mr Biden in the November 3 election and a Democratic sweep of Congress have quickly become a scenario that investors can’t afford to ignore. While some analysts say the party’s proposed tax hikes may hurt corporate profits, others are focusing on the potential benefit from their agenda, such as a boost in fiscal stimulus.

The trade is very much indicating that someone believes that we'll get the push for a Democratic Senate

Mr Biden’s chances of winning rose to a record 82.8 per cent from 82.3 per cent on October 6, according to the latest run of poll aggregator FiveThirtyEight’s election forecasting model. A CNN poll released on Tuesday suggests last week’s debate might have been pivotal. By 57 per cent to 26 per cent, registered voters who watched it said Mr Biden did a better job than President Trump.

“As investors digest a greater likelihood of a clean-energy-friendly Biden administration, demand for solar and other alternative energy has increased,” said Todd Rosenbluth, head of ETF and mutual fund research for CFRA Research “TAN is the largest solar ETF and has benefited from growing liquidity.”

The rush to buy building and solar shares is echoing the market froth that underpinned the summer rally, when day traders chased high-flying stocks such as Apple and Tesla, with many wagering in the option markets for quick profits. Now, similar exuberance showed up in the Invesco Solar ETF, with the cost of call options rising to a two-year high relative to puts, according to three-month implied volatility data compiled by Bloomberg.

To Dennis DeBusschere, head of portfolio strategy at Evercore ISI, optimism in the solar ETF may have gone too far. The odds for a Democratic sweep scenario now stand at 61 per cent, according to PredictIt.

“The Dem sweep is not a slam dunk,” DeBusschere wrote in a note to clients. “Some type of options strategy to take advantage of the solar ETF crashing back to Earth might be interesting.”

The Global X YieldCo & Renewable Energy Income ETF, ticker YLCO, rose for a 10th straight day – the longest winning stretch on record. Shares of American Resources jumped about 60 per cent on Wednesday, while Sunworks and Ocean Power each surged more than 36 per cent.