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Solar ETFs Hot Again; Brighter Days Ahead?

Sweta Killa

Solar stocks were victims of growth and momentum meltdown this year but roared higher last month. This was primarily thanks to improving industry fundamentals including a high level of panel installations, a surge in demand for solar power, supply shortfall expectation, falling equipment and financing costs as well as stable incentives.

Though uninspiring earnings from most of the solar companies and increased regulatory policy took a toll on the stock prices last week, this could be viewed as a solid entry point given the bright outlook for the industry (read: Gains Still Ahead for Solar ETFs despite Mixed Q2 Earnings).

Demand/Supply Trends

According to Bloomberg, global installations are expected to climb from 40 gigawatts in 2013 to a record 52 gigawatts in 2014 and 61 gigawatts in 2015. The current 2014 forecast is seven times higher than the capacity of the photovoltaic (PV.V) equipment installed five years ago. Despite increased installations, the global solar industry will likely face the first shortage of panels in eight years resulting from soaring demand and would push panel prices higher.

China, Japan and the U.S. jointly will drive more than half of the global growth. China will continue to lead the solar industry with installation capacity of as much as 14 gigawatts for the year, followed by 11.9 gigawatts in Japan and 5.6 gigawatts in the U.S.. Growth in other countries, which suffered the most from a two-year slump on global supply glut, are now recovering and these nations will also see strong demand in the years ahead (read: 3 China ETFs Surging Higher).

In particular, demand for solar energy is rapidly growing for electricity generation across the globe. Notably, total electricity production from solar power more than doubled in the first half of the year in both the U.S. and China thanks to a solar revolution. As per Lux Research, annual installations of new PV solar capacity in the U.S. saw a five-fold increase over 2010-13 and are expected to increase another 38% this year. Meanwhile, China is also seeking new ways to bolster the pace of solar power installations for the coming years.

Solar Makers in Focus

The expected supply shortfall and unprecedented demand would lead to notable revenue growth and boost profit margins for the solar makers. In fact, solar panel sales for this year are expected to rise 25% year over year.

The largest Chinese solar makers – Yingli Green Energy (YGE) and Trina Solar (TSL) – would likely be the major beneficiaries from these trends. Other manufacturers such as Canadian Solar (CSIQ), SunPower (SPWR) and SolarCity (SCTY) will also see a surge in their stock prices.

Further, the U.S. Department of Commerce recently imposed new import duties on solar panels and other related products from China and Taiwan in an attempt to boost the U.S. solar market. While this is great news for the U.S. solar stocks, some Chinese stocks might have to bear the brunt (read: Solar Import Duties Put These Clean Energy ETFs in Focus).

However, the solar sector had a solid industry rank in the top 40% at the time of writing as per the Zacks Industry Rank, suggesting a strong growth outlook for the solar firms.

Given the bullish outlook, solar energy ETFs are poised for strong rally in the coming months. Currently, there are two choices available in the space, both of which are detailed below. Any of these could be excellent picks for investors seeking to ride out the boom in solar space.

Guggenheim Solar ETF (TAN)

This ETF follows the MAC Global Solar Energy Index, holding 30 stocks in the basket. It is highly concentrated on the top 10 firms accounting for 58.3% of total assets. American firms dominate the fund’s portfolio with nearly 42.3%, followed by China (28.3%) and Hong Kong (14.2%).

The product has amassed $442.5 million in its asset base and trades in solid volume of nearly 456,000 shares a day. It charges investors 70 bps in fees per year. The fund gained over 12% over the past one month and has a Zacks ETF Rank of 3 or ‘Hold’ rating with High risk outlook.

Market Vectors Solar Energy ETF (KWT)

This fund manages a $25.2 million asset base and tracks the Market Vectors Global Solar Energy Index. In total, the ETF holds 34 solar stocks in its basket with the largest allocation going to SCTY, SunEdison (SUNE) and First Solar (FSLR). The three firms combine to make up for 26.6% share (see: all the Alternative Energy ETFs here).

In terms of country exposure, the U.S. takes more than one-third of the portfolio, closely followed by China (33.2%) and Taiwan (14.5%). The product has an expense ratio of 0.66% and sees paltry volume of about 6,000 shares a day. The ETF added about 9.3% in the trailing one-month period.

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