Solar ETFs Look for 2014 Sequel

December 19th at 7:30am by Todd Shriber

After several years of struggling and reverse splits in 2012, solar exchange traded funds bounced back with a vengeance in 2013.

With the year almost over, the Guggenheim Solar ETF (NYSEArca: TAN) ranks as the year’s top-performing non-leveraged ETF, having more than doubled. The rival Market Vectors Solar Energy ETF (NYSEArca: KWT) has not quite doubled, but the fund is on course to be this year’s second-best non-leveraged ETF behind TAN. [Seduced by Solar ETFs]

Two other alternative energy ETFs rank among this year’s 10 best, but TAN is the name-brand ETF for the alternative energy and investors are wondering if that fund (and KWT) can keep the good times going next year. TAN and KWT have a chance and here’s why:

Solar companies are solving one of the industry’s long-standing problems: Driving costs low enough to compel end users to make the switch from traditional fuel sources.

“What’s happening now is bigger than that, it’s a full-scale commercialization of solar technology, the buildout of an entire infrastructure meant to rival the filthy, inefficient coal-burning complex at some point in the future. According to NPD, “the pipeline of large-scale solar power projects in the process of being built in the U.S. will hit 43 gigawatts his coming year,” which represents a 7% increase over such projects launched in 2013,” writes Josh Brown at The Reformed Broker.

There is even some talk that by 2020, if the current cost-cutting trajectory remains true, solar costs across the U.S. will be on par with some of the cheaper fossil fuels.

But that is just talking about U.S. solar demand. Other countries figure prominently in the global solar energy demand equation.

“Over the past six months, China and Japan both have seen a consistent increase in end-demand. Policy rate in Japan is favorable to solar project developments. In the first half of 2013, the country reported 3.4GW of new installations. Citi estimates that end-demand would rise to 7GW in Japan, and 10GW in China by the end of 2014. Global end demand is expected to grow 20% from 35GW at the end of 2013 to 42GW by the end of next year,” according to ValueWalk.

China is the elephant in the solar room much the way it is with commodities like copper, nickel and related fare. The country’s willingness to prop up its ailing solar firms cannot be ignored as a catalyst for solar ETFs. China is, after all, almost 37% of TAN’s weight and that does not include the 12.3% weight to Hong Kong.

As for whether TAN and KWT can make it on to the 2014 top-10 list, only ETFs from 2012 made it again this year: The Market Vectors Biotech ETF (NYSEArca: BBH) and the iShares Nasdaq Biotechnology ETF (NasdaqGS: IBB).