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Solar ETFs: Cloudy Outlook

As Germany aims to cut subsidies to the fledgling solar energy industry, the Market Vectors Solar Energy ETF (KWT) and Claymore/MAC Global Solar Energy ETF (TAN) have been hit hard in 2010. Year to date, KWT is down nearly 16%, while TAN has fallen more than 14%.

While times may be tough for these Germany-heavy portfolios, the recent dip may be a buying opportunity for risk-tolerant investors.

German-based companies, which make up 29.69% and 28.5% of TAN's and KWT's portfolios, respectively, have been under pressure as Germany looks to trim its government subsidies. Government support has helped to make Germany a solar energy hub, where production of panels has soared.

Last week, however, Environment Minister Norbert Roettgen announced that the government would propose a cut of 15% in addition to reductions already outlined in Germany's Renewable Energy Act. This helped to put further pressure on both TAN and KWT.

ETF investors should look beyond the current setbacks in Germany, and look instead at the long term potential for solar energy production. While Germany may be TAN's top country allocation, it is followed closely by China and the U.S., with 28.37% and 24.32% allocations, respectively. Rounding out KWT's three largest country allocations are also China and the U.S.

While Germany's subsidy setback has put a damper on TAN and KWT, China and the U.S. could help to lead these ETFs upward. China has the potential to become a dominant global leader in solar energy production, while green-energy initiatives in the U.S. could help to boost both funds in the months ahead.

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