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Can Solar ETFs Continue Their Rally in 2014?

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2013 was a banner year for Solar ETFs thanks to the favorable green energy trends and Obama’s ‘Climate Change Action Plan’. Basically, the demand for renewable energy trends is growing rapidly for electricity generation across the globe. Additionally, global warming and high fuel emission issues have resulted in the growing popularity of this clean energy source. 

Solar ETFs continue to soar this year as well, and have so far been the top performing funds in the alternative energy space. There are two funds in the solar space, the Guggenheim Solar ETF (TAN) and Market Vectors Solar Energy ETF (KWT) and both of these generated impressive returns of about 18% and 14%, respectively, in the first 15 days of this year on top of rock-solid returns of 126% and 93% in 2013 (read: Inside the Incredible Surge in Solar ETFs).

What’s Behind This Latest Surge?

While the U.S. and China have been playing a great role in recent years in driving the industry, other nations are pushing hard to have a home-grown solar plant as a remedial measure to their electricity crisis. The latest to join this list is Asia’s third largest economy – India.

India recently planned for a $4.4 billion solar plant which could arguably be the world’s largest. The tumbling cost structure helped India to take on such a gigantic project. As per Sources, ‘power from imported coal and domestically produced natural gas costs around 4.5 rupees a kilowatt-hour while solar energy costs are seven rupees – down sharply from 18 rupees in 2010’.

Better economies of scale, increasingly cheaper panels and modules,  as well as faster Chinese expansion leading to an oversupply of equipment have pushed the prices down of panels.

The project will involve low-cost foreign technology – mainly Chinese – to generate 4,000MW of solar energy. Apart from China, India will import equipment from the U.S. and Taiwan.

Thus, it is quite easy to understand that India’s colossal solar power project will end up benefiting the same industry in China, the U.S. and Taiwan. And here lies the trick as to why TAN and KWT are exhibiting an uptrend.

ETF Exposure

Both TAN and KWT have sizable exposure in these three countries. While China takes up 35% of TAN’s $356 million of assets and the U.S. consumes 26%, KWT puts $23.7 million of assets in the U.S., Taiwan and China in proportions of 28%, 20% and 18%, respectively.

A few days back, this emerging global solar industry had been through choppier performances thanks mainly to overcapacity and falling prices. However, India’s recent venture will certainly give a much-needed boost to the Chinese solar industry thus benefiting the ETFs greatly (read: Are Solar ETFs in Trouble?).

Both the funds are currently hovering near their 52-week high level. TAN recorded a 52-week range of $15.00–$41.97 while KWT registered an impressive range of $35.39–$83.15 per share. The range clearly explains what a stupendous rally the duo has seen in last one year (see all the top Ranked ETFs here).

Other Drivers

The demand for solar panels in utility, commercial and residential projects is surging in the United States. The EIA projects that utility-scale solar capacity will expand by about 40% between year-end 2013 and year-end 2015 in the U.S., in tandem with considerable consumption growth in renewables for electricity and heat generation purpose.

The U.S.-based solar companies including SunPower ((SPWR - Free Report) ), SolarCity (), First Solar ((FSLR - Free Report) ) and SunEdison () all have decent Zacks Ranks. SPWR and FSLR currently carry a Zacks Rank #1 (Strong Buy) and SCTY presently has a Zacks Rank #2 (Buy) suggesting that these stocks still have more to offer, though it’s unlikely to outpace the stellar performance of 2013 (read: First Solar Earnings Beat Puts Solar ETFs in Focus).

Demand is also building up in Japan. Japan's domestic solar cell shipments more than tripled year over year in the time frame of July to September, while exports shrank two-thirds. Also, Japan closed its nuclear fleet following the Fukushima disaster in March 2011 leading to a surge in renewable energy options.

Can This Uptrend Last?

The short-term moving averages of TAN – the bigger Solar ETF – are well above the long-term averages as depicted in the chart below. This suggests continued bullishness for this ETF.

However, there is a drag in the relative strength index that stands at 62.38 suggesting that the fund is near overbought territory and might succumb to a downward correction in the near term.

Thus, though the near-term outlook does not look promising, solar ETFs would regain strength in the coming few months. The funds might slip in the coming days because of profit taking activity, but should shine by the end of 2014 as the underlying fundamentals are strengthening across all regions of the globe, suggesting this year might be another bright one for the solar ETF market.

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