Solar ETF’s Secret Sauce

Despite an often checkered past that includes some rough years and a reverse split, the Guggenheim Solar ETF (NYSEArca: TAN) is once again piecing together an impressive performance.

TAN, the largest of the two dedicated solar ETFs, is turning in another impressive showing this year after ranking as 2013’s top-performing non-leveraged ETF. Last year, TAN more than doubled. Of course, TAN’s stellar showing over the past 18 months or so is the result of soaring solar stocks such as First Solar (NasdaqGS: FSLR) and Elon Musk’s SolarCity (NasdaqGS: SCTY). Those stocks currently combine for 15.4% of the ETF’s weight. [Solar ETFs Brighten Again]

However, there is more to TAN’s recent upside than meets the eyes. That includes a well-oiled securities lending operation that has enabled the fund to top the MAC Global Solar Energy Index, its underlying index.

“But over the past few years, the ETF has beaten the MAC Global Solar Energy Index by a median of 3.6 percentage points a year,” reports Ari Weinberg for the Wall Street Journal. “That’s because like many funds, Guggenheim Solar, lends some of its holdings to other investors, often short sellers looking to bet that prices will fall. The fund collects a fee, which can balloon when demand is high.”

Two TAN holdings – SolarCity and GT Advanced Technologies (NasdaqGS: GTAT) – currently rank among the most shorted stocks on Wall Street with short interests of 29.2% and 34.3%, respectively, according to Business Insider. Those stocks combine for 13.5% of TAN’s weight.