Solar ETFs Offer Best Bets Under the Sun

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The solar industry is experiencing growing pains. Cheap polysilicon and lower-than-expected sales are hurting even the strongest companies.

The long-term appeal of the industry is unmatched, but it's a dangerous time to buy individual stocks. The best way to play solar is to build a position using exchange traded funds.

The Claymore/MAC Global Solar Energy Index Fund(TAN Quote) and the Market Vectors Solar Energy ETF(KWT Quote) provide exposure to established players like First Solar(FSLR Quote) and small-caps like Canadian Solar(CSIQ Quote). These stocks could double or triple in value when the economy recovers.

This year, Claymore's TAN has gained 0.9% while Market Vectors' KWT has dropped 4.6%. The funds have eight of their top 10 holdings in common, but the Claymore fund benefited from its larger position in First Solar, the only U.S. solar firm to post a first-quarter profit.

In the past month, both funds have lost 19%, three times more than the S&P 500 Index. So what new woes are weighing on solar?

The industry's biggest problem is that polysilicon, a material that absorbs sunrays, has become absurdly cheap. The price has fallen to $65 a kilogram from a high of $450 in mid-2008. Analysts say prices could sink to $35 by year-end.

Low oil prices and weak demand for consumer electronics are adding to the polysilicon glut. Interest in alternative energy grew in the months before oil prices crested at $147 a barrel in July 2008. Now that oil goes for less than $70, people are less likely to buy expensive solar equipment.