Big Differences Between Two Solar ETFs

No pun intended, but the Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT) have shined bright in 2013.

The good times for TAN and KWT were extended Monday when the funds gained 8.5% and 6.7%, respectively, after China, the world’s second largest economy, said it plans to quintuple its solar panel grid. Additionally, the Chinese government is providing tax breaks for solar companies to acquire, merge or reorganize their operations in an attempt to consolidate the industry. [China Helps Solar ETFs Shine]

Year-to-date, TAN is up 76.2% while KWT has advanced 52%. Those gains make the pair the two best-performing non-leveraged ETFs in 2013. The International Energy Agency recently stated that wind, solar, bioenergy and geothermal power could expand 40% over the next five years, or double the 20% growth in 2011, indicating that TAN and KWT have begun to price in future increases in solar consumption. [Solar ETFs Dazzle in Second Quarter]

While both ETFs have clearly delivered stellar gains, a gap of 24 percentage points between two funds tracking the same sector is noticeable. The answer to that riddle comes from the ETFs’ holdings. Both feature First Solar (NasdaqGM: FSLR) as their holding and that is a good thing since that stock is up 56.2% in the past six months. However, TAN has a 9.68% weight to First Solar while KWT’s weight to the stock is 7.85%.

Trina Solar (NYSE: TSL) is another stock that helps account for the performance gap between TAN and KWT. That stock, which has surged 37.5% in the past six months, is almost 4.6% of TAN’s weight, but just 2.7% of KWT’s weight. Canadian Solar (NasdaqGM: CSIQ), a stock that jumped 20.6% on Monday, is 3.78% of TAN’s weight, but less than 2.6% of KWT’s lineup.

Overall, TAN is the more concentrated of the two ETFs with just 26 holdings compared to 34 for KWT, an approach that clearly works when solar stocks are scorching hot. However, a stock that is conspicuous by its absence from KWT, but found on TAN’s roster is one of the main reason’s why TAN has been the better performer.