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.

Both TAN and KWT are bargains at these prices, but investors are better off sticking with the more liquid TAN. KWT's three month average daily trading volume is just 23,600 shares a day, while TAN's is over 381,000.

Investors looking for a broader bet on clean energy, with solar energy exposure, should consider the PowerShares WilderHill Clean Energy ( PBW). Holders of this ETF have felt a setback in early 2010, as top holdings like GT Solar International ( SOLR) and Evergreen Solar ( ESLR) have come under pressure in recent weeks. Year to date, PBW has fallen 13.09%.

It is still early in the year, however, and the demand for alternative energy sources continues to grow. PBW, one of my top three ETF picks for 2010, ( Top Three ETFs for 2010) has a broad portfolio of renewable energy holdings that should continue to thrive in the wake of the solar setback.

SOLR, PBW's top component at 2.80%, is reporting its fiscal third-quarter results tomorrow, and the results should be a good indicator of the health of the solar energy industry outside of Germany. SOLR, whose global headquarters are in Merrimack, N.H., recently signed contracts in excess of $40 million with two wholly owned subsidiaries of China-based GCL-Poly Energy Holdings.

Government incentives and support will continue to be an important part of the green energy industry, as will the prices of traditional fuels like oil and gas. While Germany's early cuts could hold back solar in the short term, a continuing need for energy alternatives will drive ETFs like TAN, KWT and PBW over the long haul.

Don Dion is president and founder of Dion Money Management, 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.

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