A Reason for Caution With Solar ETFs

With gains of 42.3% and 32.3%, respectively, the Guggenheim Solar ETF (NYSEArca: TAN) and the Market Vectors Solar Energy ETF (NYSEArca: KWT) are two of this year’s top-performing non-leveraged exchange traded funds.

However, investors may want to approach these funds, particularly TAN, with caution as one stock is acting as the primary driver of the solar industry’s recent bullishness. China’s Hanergy Thin Film Power Group, a once obscure Hong Kong-listed solar firm has surged sixfold in the past year, boosting shares of TAN along the way, but providing some single-stock risk in the process, reports Chris Dieterich for Barron’s.

Hanergy Thin Film Power Group accounted for 11.45% of TAN’s weight at the close of trading Friday. That is more than 300 basis points higher than the ETF’s allocation to its second-largest holding, SunEdison (NasdaqGS: SUNE). [Sunscreen With Solar ETFs]

By comparison, KWT allocates “just”7.78% of its weight to Hanergy Thin Film, making that stock the ETF’s second-largest holding behind SunEdison and explaining why KWT has lagged rival TAN this year.

Top-heavy sector and industry ETFs are not uncommon. Most cap-weighted technology ETFs feature allocations to Apple (NasdaqGS: AAPL) that are often 500 basis points or more above the funds’ second-largest holdings. Cap-weighted energy ETFs often sport massive combined weights to Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX).