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Finally Some Good News for Solar ETFs?

Eric Dutram

Despite high hopes for the solar industry, the last few years have seen anything but good news for the space. A flurry of bankruptcies, declining subsides and a new carbon fuel boom have pushed many investors to throw in the towel on the once promising space.

Nothing appears to be even slowing the slide in the industry as the sector continues to underperform no matter who is in office, what fuel prices are, or what the outlook is for carbon trading or other pro-green energy proposals. Seemingly solar is the power of the future and it always will be (see Why You Don’t Need Both the Palladium and Platinum ETFs).

While there are a number of publically listed solar stocks in the market, an ETF approach seems to be a better way to tackle this market. That is because here more than in most segments, a single firm can seemingly fall apart overnight, suggesting that a more spread out technique could be the way to go.

Although this hasn’t helped too much in the solar industry, it arguably has saved at least a few investors from some damage, despite the overall slide in the broad market. As of right now, the choice usually comes down to two funds, the Guggenheim Solar ETF (TAN), or the Market Vectors Solar Energy ETF (KWT).

These two, while they have some small differences in their holdings, have moved more or less in lockstep for pretty much their entire histories. Unfortunately this isn’t exactly good news, as both have lost more than 50% since February, with a similar slide in the second half of 2011 as well (see The Five Best ETFs over the Past Five Years).

In fact, in the trailing three year period, both products have lost more than 75% of their values, suggesting that while some people might be predicting a green revolution, we haven’t seen any evidence of it taking place in the solar space over the past few years.

Bright Spot?

While things certainly aren’t looking good now, many are still bullish on solar power in the long term. Fossil fuels will not last forever, and while the natural gas boom may have bought us some time, products like wind and solar look to play a bigger role in the energy mix no matter what happens in the future.

Furthermore, China and other emerging markets need immense amounts of energy to continue powering their growth, and it seems unlikely that traditional power sources will be able to provide enough over the long term. That is why many of these markets have taken a more favorable approach to the space and have been happy to subsidize some growth in the segment (see Time to Consider Pure Growth and Value ETFs?).

Unfortunately, thanks to post-crash belt tightening, this sort of funding has been harder to come by for many, adding to the woes of the solar space. While this continues to be the trend far and wide, investors in the solar market did finally get a good piece of news with a report that China would be pumping more into the solar space.

Chinese state news reported that the nation would be adding another $1.1 billion in subsidies to the space, doubling the government’s investment in the sector. This news put many minds at ease as China was already seeing a squeeze on exports thanks to U.S. and EU protests, so this could help to reflate the important Chinese solar market.

"What Beijing is doing is essentially trying to replace the diminished export sales with lower price, lower margin domestic sales," said Raymond James analyst Pavel Molchanov in a Reuters article. "It is a backdoor bailout."

Obviously this was taken as great news by the solar industry, helping to push up some Chinese U.S. listed solar firms by nearly 20% on the session, while American-focused ones also saw strong gains as well. This led to a nearly 10% gain for both KWT and TAN on the day, marking one of the best sessions in recent memory for the space, and helping to reverse the latest slide (read Solar ETFs in Focus on Chinese Import Tariffs).

While we certainly aren’t going to dare to call a bottom on the solar ETFs, the doubling of the subsidies is definitely encouraging. With the added support of the world’s top manufacturers and users of solar power at its back once more, brighter days could be ahead for the beaten down space, although caution will have to be applied before making a big bet on the segment, at least in the short-term in this volatile market.

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