China Solar Power: Sunny Days Ahead For Solar ETFs?

by on May 18, 2011 | ETFs Mentioned:

After a rough 2010, alternative energy equities have been swinging back and forth all year long without establishing a clear trend. With 2011 being quite a busy year thus far, the only real attention that alternative energies have received has been quite negative, as many have called for the end of nuclear power after the tragedy that struck Japan. But now that the fears of nuclear power have slowly calmed, investors have looked to their rational side putting away unrealistic notions regarding the nuclear industry, especially given the numerous and devastating oil spills that the world has seen in the past two decades in contrast. Although most forms of alternative energy have stayed on the backburner for the majority of the year, news from China will bring solar power investments back into the limelight [see also Three Alternative Energy ETFs To Watch As Japan Drama Plays Out].

Recently, it was announced that China, the world’s most populated country, will be doubling their solar power usage by the year 2015. On top of adding 5 more gigawatt hours in four years, the country also has outlined plans to achieve a total capacity of 50 gigawatt hours by 2020, meaning that the increase of solar power between 2015 and 2020 will be fivefold. With China being the world’s largest maker of solar panels, this estimation does not seem too far fetched, and has investors chomping at the bit to cash in on this massive increase in alternative energy from one of the few countries with the budget flexibility to pursue such a program [see also Seven Best ETF Performers Of Q1 (And Five Of The Worst)].

As a reference point, one gigawatt of energy is equal to one billion watts. According to a 2007 report form the U.S. Energy Information Administration, the average home uses 11,232 kilowatt hours of energy on an annual basis, though estimates vary across the board. This means that one gigawatt is enough energy to power roughly 90,000 homes for a year, and the proposed 50GW by 2020 will be able to power roughly 4.5 million homes per year.

When it comes to forms of energy, emerging markets have an advantage over developed markets in that they have the unique ability to adopt any energy policy that they choose without having to make many radical changes. One of the biggest factors hindering alternative energy growth is the fact that most developed nations already have fossil fuel-based systems in place, which would be too expensive and too much of a hassle to overhaul. Major nations like China will have the chance to choose which fuel they wish to use for the future, and it seems that solar power will be a vital part of China’s energy production [see also Five ETF Picks For Your IRA].

Below, we outline two solar ETFs to help investors take advantage of the growth forecast for the Chinese solar power industry.

Market Vectors Solar Energy ETF (KWT)

This ETF replicates a benchmark that is made up of securities that derive at least 66% of their revenues from solar power and related products and services. Top holdings in this ETF include First Solar (10.8%), Trina Solar (9.2%), and MEMC Electronic Materials (8.6%). As with most alternative energy funds, KWT invests the majority of its assets in companies that are below large cap levels, giving investors plenty of potential for growth, but also the risks that are associated with buying in to smaller companies. With over 31% of its assets being dedicated to China, KWT makes for a perfect play on the robust growth predicted to hit one of the world’s most popular emerging markets [see KWT's fundamentals here].

Guggenheim Solar ETF (TAN)

TAN is a very similar fund to KWT, though it tracks the MAC Global Solar Energy Index, which has a slightly different investment methodology than KWT. TAN differentiates itself by giving different weights to holdings that both ETFs share, as well as investing a fair amount of assets in the utilities and industrials sectors. TAN puts over 36% of its funds into Chinese securities, making this fund another good option to make a play on this expected jump in growth. Thus far in 2011, TAN has returned 12.3%, compared to KWT’s 8.4%.

Investors should note that while these two funds are very similar, there are subtle differences (as noted by YTD performances) that may make one ETF a better option depending on one’s investment thesis.

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Disclosure: No positions at time of writing.