Solar exchange traded funds are shining brightly Wednesday on improved demand and inventory levels. After ending 2011 as one of the worst performing sectors, solar stocks and ETFs may now be undervalued, Deutsche Bank says.

Guggenheim Solar ETF (NYSEArca: TAN) gained 12.7% at last check Wednesday, and Market Vectors Solar Energy ETF (NYSEArca: KWT) jumped 13.3%. Meanwhile, the Powershares WilderHill Clean Energy Portfolio ETF (NYSEArca: PBW) was up 5.8%.

According to a Deutsche Bank report, solar industry stocks are undervalued, given the favorable demand outlook and lower inventory levels, reports Eric Rosenbaum for MarketWatch. [Alternative Energy ETFs Trounced in 2011]

“Recent conversations indicate investor sentiment is still very low and short interest near record levels. Given the rising 1H12 demand prospects in Europe/US, we now believe the recent trend of encouraging poly pricing data points could likely continue for the next month and as such, likely drive solar stocks higher,” Deutsche Bank analyst Vishal Shah wrote in the note. “Although we expect solar companies to report losses during the upcoming Q4 earnings reports, we note that street estimates are already low and confirmation of the above trends could likely drive upside sentiment surprise.”

“Our checks indicate that inventory levels across the supply chain are now at record low levels and we believe record December month shipments is likely to create a sense of rush among installers in 1H12 before another anticipated 15% subsidy cut from July,” Shah added.