ETF Talk: Are Solar ETFs Heating Up?

The sun brings forth incredible heat that warms, illuminates and energizes our planet. With the Obama administration becoming a powerful advocate for a strategy of increased use of alternative energy sources, it seems like solar power is destined to be a key component in that strategy. The question now for investors is how and when to profit from the political clout of a new president who has promised to make alternative energy one of his top priorities.

With both President Obama and his fellow Democrats who control Congress looking to fund clean energy initiatives, solar energy exchange-traded funds (ETFs) could start to shine. Right now, solar ETFs are trading at a fraction of their 52-week highs, yet in the last week of March, the performance of solar ETFs brightened.

Certain solar ETFs soared 20% to 50% over a very short period. The sector’s surge followed an announcement that the Chinese government intends to support the development of solar energy. China’s plan would offer $2.94 per watt for solar photovoltaic installations of more than 50 kilowatts. That amount may not sound like much money, but it certainly adds up fast in a huge and still vastly underdeveloped country like China.

The spurt in solar ETF prices is reflected in the chart below that compares the Market Vectors Solar Energy (KWT) and the Claymore/MAC Global Solar Energy (TAN) to the S&P 500. Both of these ETFs were beaten down in February, but they have soared nearly 50% since the market rally started on March 9. Part of the reason both of these ETFs shot up so quickly is that they are heavily weighted in China, with more than 20% of their holdings in Chinese companies.

While solar stocks have been volatile this year, they still could offer good opportunities for long-term investors if governments around the world fund development. But here’s a word of caution. Despite President Obama’s call for alternative energy initiatives and the Chinese government’s announcement of its support for solar energy, analysts are divided about whether investors have enough reason to bet on the trend. For example, critics of China’s announcement cited its lack of detail or a definitive timeline.

With the market as volatile as ever, it is uncertain which direction solar ETFs will go next. If the United States and China choose to fund alternative energy projects, then solar ETFs have a good chance of shining. But if the funding fails to heat up, the sector could be in for some cloudy days ahead.

As always, I am happy to answer your questions about ETFs. To send me your questions, click here. I will try to follow up in a future ETF Talk.