NEW YORK (TheStreet) -- Although alternative energy funds have been undeniably unstable over the course of the year, let's take a quick look under the hood of the Claymore/MAC Global Solar Index (TAN) - Get Report and Market Vectors Solar Energy (KWT) , to gather our thoughts on the sector.
Based on year to date performances, the solar industry looks to be faring poorly in the market's turbulence. After peaking in early to mid-January, both TAN and KWT have both seen a dramatic decline throughout 2010, incurring respective losses of 26.7% and 25.5%.
However, all hope for the floundering sector is not necessarily lost. According to a recent report released by the International Energy Agency (IEA), China's energy-dependence has reached global proportions. The study concludes China has recently achieved the status of the world's largest energy consumer, and has revamped its efforts looking into cleaner, more efficient energy sources.
Consumption statistics are staggering to say the least. In 2009, China consumed 2.252 billion tons of energy (and relevant energy equivalents), surpassing the consumption of the U.S. by a solid 4%.
Much of this energy demand was driven by exponential growth in the respective industrial and infrastructure sectors. And as a growing power, the nation's craving for energy is likely to expand.
In response to heightened CO2 gas emissions, China has agreed to plans of emission reduction, especially through the establishment of greener energy alternatives.
China plans to devote $738 billion over the next decade to cleaner energy sources, and has already made substantial progress. Nearly one-third of nuclear power plants currently under construction are Chinese, and China built more wind turbines last year than any other nation.
Most importantly, the green Chinese movement has led to more than $11 billion in capital for renewable developments in the second quarter alone, topping the US. and EU, combined.
Relating this back to the solar sector, China's efforts in the energy management department speak well for ETFs designed to track the global solar energy industry, given their high exposure to Chinese companies. TAN devotes nearly 30% of its portfolio to Chinese solar corporations such as
In comparing TAN and KWT, one should note that their top holdings are highly similar, but the funds extensively vary by volume.
In terms of holding composition, the two products are extremely similar. TAN's top five holdings include
, 9.93% of assets;
, 4.94%; and
MEMC Electronic Materials
Four of these five holdings are mirrored in the pinnacle of KWT's portfolio, with First Solar securing 12.76% of the fund, and MEMC, Suntech, and Meyer Burger representing 9.37%, 8.48% and 8.27%, respectively.
SMA Solar Tech
takes the last 4.80%, rounding out KWT's largest holdings.
While TAN features a slightly lower capped expense ratio at .65%, as compared with KWT's .66%, the most blatant difference between the funds is volume-related. TAN boasts a sizeable volume of roughly 226,000, as compared with KWT's paltry 1,300.
As is the case with many other fund pairs, timing and date of inception play a big role here in explaining away this discrepancy. TAN was first unveiled on April 15 of 2008, while KWT hit the markets six days later. Although this delay is small, it has had a dramatic effect on the two funds' popularity.
To conclude, solar ETFs are still a shaky play, at best. The sector has been suffering extensively throughout the course of the year, so wary investors should invest accordingly.
That being said, the products' inherent exposure to China may prove to be a turning point for their long term performance, as the Chinese nation amps up its green efforts over the next few year. If strength is in the cards for the solar industry, the more liquid TAN would be the safest choice.
-- Written by Don Dion in Williamstown, Mass.
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At the time of publication, Dion Money Management was not long any of the stocks mentioned.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.