It has been hard for some investors to not be smitten with the Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT) this year.

After all, TAN is the best-performing sector ETF this year. KWT is second-best. Both have more than doubled as the fundamental outlook for the previously downtrodden solar space has legitimately improved.

Cheaper financing, including the proliferation of solar leasing, has helped bolster once dim prospects. The Chinese government stepping up to help its ailing solar firms has been a significant catalyst as well and one that cannot be understated. Not when China and Hong Kong combine for over 49% of TAN’s country weight and not when China and Taiwan combine for almost 42% of KWT’s weight. [Solar ETF Rally: More to Come]

Explosive solar demand in the Asia-Pacific region has also been instrumental in lifting TAN and KWT.

“We estimate that global solar demand in 2014 will be about 45 gigawatts, up more than 20% from our 2013 projection. We expect the Asia Pacific region to account for more than 45% of global demand in 2014, with the majority of that coming from China and Japan. Specifically, China is looking to increase its pipeline of large-scale projects while Japan benefits from the most attractive solar incentives in the world,” said S&P Capital IQ in a new research note.

The research firm is bullish on several solar stocks, including First Solar (NasdaGM: FSLR), the largest U.S. solar company. S&P Capital IQ has a four-star rating on First Solar, which is TAN’s largest holding at 7.2%. First Solar is also KWT’s largest holding, occupying 9.7% of that ETF. [First Solar: Not the Best Stock in Solar ETFs]

S&P Capital IQ also has four-star ratings on Trina Solar (NYSE: TSL) and SunPower (NasdaqGM: SPWR), which combine for 9.7% of TAN’s weight. SunEdison (NYSE: SUNE) earns a five-star rating from S&P Capital IQ. That stock is 5.7% of TAN’s weight, but not a member of KWT’s 32-stock lineup.

The research firm as a three-star rating on Elon Musk’s SolarCity (NasdaqGM: SCTY). That stock, which has more than quadrupled since its January IPO, has been a member of TAN for most of this year, but was recently added to KWT. That accounts for some of the performance gap, in TAN’s favor, between the two funds. [Solar ETFs Soar Ahead of Solar City Earnings]

S&P rates TAN and KWT underweight, but that is not necessarily a bearish call.

The two ETFs “are rated as Underweight, mainly due to their high expense ratios and negative fair value metrics associated with these vehicles, we believe they still have favorable attributes. For instance, both have a positive S&P Capital IQ STARS outlook,” said S&P in the note.

Guggenheim Solar ETF


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