ETF Talk: Are Solar Stocks Heating up?

Today???s ETF Talk is aimed at educating you about investing in solar energy. I am not recommending today???s featured fund, Guggenheim Solar (TAN), but I want you to be aware of it for the future. My intent is to build upon our series of energy sector ETF Talks by taking a look at the solar energy sector, since it receives quite a bit of attention in the media as an opportunity for the future. In my view, solar energy remains a sector to monitor, not to invest in now.

As anyone who can recall the government-supported disaster that was Solyndra knows, solar energy is simply not a profitable investment at this point. However, it is important, when evaluating a sector such as energy, to examine all of its segments so that you can make an informed decision about where to invest your money.

TAN is a non-diversified fund that targets results which, before fees and expenses, correspond generally with the performance of an index comprised of around 22 holdings chosen due to the relative importance of solar power in the company???s business.

While TAN???s 13.52% growth so far this year and 7.94% yield may look enticing, it poses significant risk. Remember, solar energy is heavily subsidized by the government. With the sequester cuts coming in and the ongoing budget battles looming, this support from Uncle Sam could be reduced at any point.

One oddity is that none of TAN???s holdings are in the energy sector. Indeed, the technology sector possesses the majority of TAN???s assets, with 81.44%. The remaining sectors are utilities, 11.34%; industrials, 5.61%; and consumer cyclical, 1.61%. The fact that energy sector companies are not held by the fund indicates that solar energy is not a self-sustaining industry; it must rely on outside support, and it still is developing.

TAN???s top ten holdings make up 63.68% of its total assets, with GCL-Poly Energy Holdings Limited, a Chinese company not traded on American exchanges, leading the way with 11.34%. The remaining top five holdings are: MEMC Electronic Materials, Inc., 7.74%; SunPower Corporation, 7.52%; First Solar, Inc., 7.51%; and Power-One, Inc., 5.83%.

While alternative sources of energy, such as solar, may conjure up images of a shining utopian future, they are not sound, profitable investments at this point in time. With more traditional fossil fuels expected to drop in price in the near future, due to new and better methods of locating them and producing fuel, combined with potential cuts in federal support, it is a better move to invest your hard-earned money in a safer industry than solar.

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