The Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT) are two of the best-performing non-leveraged sector ETFs this year. TAN and KWT are up 69.2% and 41.7% year-to-date, respectively.

Solar stocks have gotten a lift from high oil prices and news that China will expand its solar capacity, among other fundamental factors. The greater capacity will help the developing country diminish its reliance on exports and ease oversupply of photovoltaic panels – last year, solar stocks plunged as a supply glut contributed to a 20% plunge on the average price of solar panels. [Solar ETFs Shine as China Expands Capacity]

Those improved fundamentals have forced solar bears, many of whom piled into TAN and KWT holdings last year, to cover their shorts. In turn, that short-covering has played a role in the good fortune experienced by these ETFs this year. Investors should note that short interest is again on the rise in some marquee TAN and KWT holdings. [Big Differences Between Two Solar ETFs]

For example, First Solar (NasdaqGM: FSLR), the largest U.S. solar company, has seen its short interest rise to 11.24 million shares as of August 15 from 9.28 million shares on July 31, according to Nasdaq data. SunEdison (NYSE: SUNE) saw its short interest jump 46% to 16.92 million shares over the same period. Those stocks combine for 13.3% of KWT’s weight and 12.7% of TAN’s weight.

Short interest in SunPower (NasdaqGM: SPWR) also rose modestly. That stock accounts for 5.2% of KWT and just under 5% of TAN, the larger of the two ETFs. Other solar stocks that saw significant short increases in the July 31-August 15 period include Canadian Solar (NasdaqGM: CSIQ), China Su Energy (NasdaqGM: CSUN), LDK Solar (NYSE: LDK) and Yingli Green Energy (NYSE: YGE).

Canadian Solar and Yingli Green Energy combine for 8.7% of TAN’s weight. Aside from the potential for short-covering, there is an added benefit to rising short interest in solar stocks that pertains directly to TAN. Due to the issuer’s savvy securities lending efforts, TAN sports a solid yield even though solar stocks are not known as dividend destinations. Short sellers pay fees to borrow shares to short from TAN and the issuer passes those fees along to investors in the form of a dividend.

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