NEW YORK ( TheStreet) -- Claymore/MAC Global Solar ( TAN) and Market Vectors Solar ( KMT) have rallied since early June, but with earnings season fast approaching, can these ETFs break to higher ground, or will the rally run out of steam?Solar ETFs have taken a beating in 2010. TAN fell from almost $11.50 per share in early January, all the way down to $6 in June, a nearly 50% drop in six months. KWT saw similar results. The decline erased most of the post-crash rally in solar ETFs. Although they did not reach their all-time lows, shares were as cheap as they were toward the end of March 2009. Over the past two months, however, the behavior of solar ETFs has changed. While they spent most of the previous year lagging the broader stock market indices, they've started to outperform since June. TAN and KWT bottomed earlier that month, making a higher low in early July, while the SPDR S&P 500 ( SPY) hit a new low in July. However, these are not the only ETFs to behave in this manner. The charts of European country ETFs show similar patterns, which provide some clue to the rebound in solar shares. European companies represent a significant slice of assets in the solar ETFs, and more importantly, European governments provide some of the most generous subsidies to the alternative energy sector. Country exposure is relatively straightforward. Almost 20% of KWT's assets are in Germany, while 0.5% represent Spain. Great Britain accounts for another 1.4% of assets and its markets behaved similarly. TAN reports 27% of assets in Germany, 2.3% in the U.K. and 1.3% in Spain. Also, Switzerland's markets have outperformed their broader European counterparts, and TAN has 5.3% of assets in that nation. Beyond direct exposure to European shares are the European subsidies. First Solar ( FSLR)'s performance has mirrored that of European stocks, while even SunPower ( SPWRA) has shown similar correlation. SunPower has been among the worst performing solar stocks, hitting a new all-time low in June; shares are still down almost 50% this year, yet even it has followed the group higher.
European governments slashed solar subsidies in the wake of budget and sovereign debt crises over the past year. However, most of the cuts are priced in, and the stabilization in Europe has kept further cuts off the table for now. With the euro rebounding against the U.S. dollar, the American and Chinese solar producers have seen the value of remaining subsidies increase. (China represents about 30% of assets in both funds.) There have also been some delay in the cuts. In Germany, the cuts will be implemented in two steps, with the bulk of them retroactive to July 1, others coming on Oct. 1. As the subsidies stabilize and the global economy continues to chug along the path to recovery, investors are starting to turn their attention to solar earnings. This week, First Solar and MEMC Electronic Materials ( WFR) report. Estimates for FSLR have held steady and the stock has performed well over the past month, whereas WFR has seen estimates drop and shares hit a new low in early July. However, Barclay's upgraded WFR this morning and raised estimates; shares spiked about 3% in midday trading. This upgrade bodes well for the future success of solar investment. FSLR is the top holding in both solar ETFs with roughly 10% of assets, making it the most important single stock in terms of direct impact. WFR supplies the industry, however, and a good report or surprise upside could extend the rally this week. That said, I'd still look for some consolidation ahead of earnings reports in mid-August, as TAN and KWT have already gained more than 25% in July, and I wouldn't chase shares in the wake of positive earnings this week. -- Written by Don Dion in Williamstown, Mass.