ETF Talk: A Big, Fiery Ball of Profits

It seems everywhere you look lately there are media headlines warning about a looming environmental crisis. We read about the need to "go green," and seriously begin thinking about alternative energy, as the way of the future. But what you may not know is that there are new opportunities to tap the environmental trend by including exchange-traded funds (ETFs) in your investment portfolio.

ETF providers are starting to latch onto the green theme. Two fund families, PowerShares and Market Vectors, have created their own classes of clean energy ETFs. Just this month, a pair of ETFs has been launched in the narrow but potentially profitable niche of solar energy. The cutting-edge funds are Claymore/MAC Global Solar Energy Index ETF (TAN) and Solar Energy ETF (KWT).

Claymore chose "Tax Day" on April 15 to introduce the first solar energy ETF, the Claymore/MAC Global Solar Energy Index ETF (TAN). That ETF, offered on the NYSE Arca, is designed to track 25 companies in the solar power industry. Sectors of the solar energy universe that are included in the ETF are equipment producers, companies that concentrate on selling electricity, and suppliers of materials or services, installation, integration or finance.

TAN currently invests in companies such as MEMC Electronic Materials Inc. (WFR), Suntech Power Holdings Co. Ltd. (STP), and LDK Solar Co. Ltd. (LDK). For a detailed description of this new ETF and to learn about other ETFs in the Claymore fund family, click here.

Not to be outdone, Van Eck Global chose Earth Day, April 22, to launch the Solar Energy ETF (KWT) on the American Stock Exchange. That solar energy ETF seeks to replicate the price and yield performance of the Ardour Solar Energy Index (SOLRX). That index includes companies that generate at least 66% of their revenues from solar energy. The four top holdings are First Solar Inc. (FSLR), Q-Cells (QCE GR), Renewable Energy (REC NO), and Solarworld AG (SWV GR).

KWT is expected to appeal to investors as a "pure play" in solar energy, said Jan Van Eck, principal of Van Eck Global. To learn more information about KWT and Van Eck’s other ETFs, click here.

One catalyst for solar energy stocks and ETFs in future years could be legislative initiatives aimed at spurring the use of clean energy sources and enhanced energy efficiency. Solar energy equity holdings could gain upward momentum if surcharges are imposed on companies that produce carbon emissions beyond certain limits. Legislation along such lines could be enacted by 2012 to enable U.S.-based companies to meet global emissions standards that may take effect in 2013 when the Kyoto protocol gives way to a new stage in global environmental compliance.

Exactly when the investment potential of solar energy will be realized is unclear. However, the projected growth in solar energy is huge. Solar electric output is expected to jump a whopping 400% to reach 20 GW in 2011, compared to 4 GW in 2007.

Since the best prospects for solar energy appear to be further out than the coming months, I am not recommending any of the new ETFs that focus on that industry right now. But these ETFs bear watching to see how well their volumes and prices grow. Great value can be found by focusing on a "very narrow" niche that offers big growth potential, former Nasdaq President Alfred Berkeley told more than 100 attendees during his April 17 Industry Leader speech in Washington, D.C., before the Johns Hopkins University Finance Club.

Solar energy, sooner or later, could become such an opportunity — turning the sun into a big, fiery ball of profits.