Solar ETFs Stay White Hot, What's Behind The Surge?

Easily one of the top performing sectors so far in 2013 has been the solar space. The segment has roared higher thanks to a huge level of panel installations, a focus on high beta and small cap stocks, and the desire by investors to get into quickly growing names.

This has propelled many stocks up by more than 100% on the year, with several companies seeing even better returns (including triple digit percentage moves in ETFs tracking the space YTD as well). Yet, leading up to a crucial earnings season for the sector, many solar stocks were in trouble.

The space saw flat to negative returns over the past two weeks, including a nearly 2% loss in solar ETFs at a time when the broad market was higher. Thanks to this, and due to worries over the looming earnings season, some were starting to wonder if the bull run in solar power investments was nearing a pause, if not an end.

However, recent trading in the space—and solid earnings—suggests that we might actually have a bit further to run in the solar investment space. In fact, both of the solar ETFs—the Guggenheim Solar ETF (TAN) and the Market Vectors Solar Energy ETF (KWT)—moved significantly higher (both added more than 5%) in Monday trading, and look to continue this run as more companies in the space report later in the week.

Behind the Surge

During Monday trading, gains were pretty widespread across the sector. FirstSolar (FSLR) added about 4.6% on the day, while SunPower (SPWR) jumped close to 10.6%, and SolarCity (SCTY) finished the session up more than 11.4%.

There were a number of reasons for this big jump, though solid earnings was definitely at the heart of the surge. Additionally, many are now looking for firms that report later in the week—such as SolarCity—to post solid numbers too, further adding to the trend.

Investors also saw some updated guidance figures for Canadian Solar (CSIQ), which were yet another reason to be bullish on solar power. The company announced that it expects Q3 shipments to be in the range of 460 MW to 480 MW, higher than the original guidance of 410 MW to 430 MW it provided on August 8th.

Profit margins look to be roughly double original forecasts too, so this was obviously another point for the bulls to hang their hats on going forward. Investors in CSIQ definitely appreciated it as well, as the stock moved higher by over 12% on double the average volume.

Beyond earnings, investors should also note that SunPower made an acquisition of Greenbotics, which could help the company to better compete in sandy or generally dirt heavy areas. It could also suggest that we might finally start to see some M&A activity in the solar market, a situation which may help to boost share prices as well.

ETF Impact

The two ETFs in the market have big holdings in many of the aforementioned companies, and thus were big beneficiaries on the day. TAN was up nearly 8.4% on the session, on volume that was roughly four times normal, while KWT also saw a huge volume increase, and gains of about 5.9% on the day.

KWT actually gives its top weight to FSLR, while SCTY and SPWR also find their way into the top ten holdings. For TAN, FSLR again takes the top spot, while SCTY, CSIQ, and SPWR are all top five allocations.

Due to this bigger allocation to some of the big winners on the day like Canadian Solar, TAN easily outperformed its counterpart on the session. Investors should also note though, that TAN is winning on a longer term look too, as it has outperformed its counterpart 129% to 93% year-to-date (before today’s gains).

Still, both are clearly crushing the market, and with today’s jump are outperforming the S&P 500 on a year-to-date basis even more. And with the trend towards higher guidance and earnings beats as of late, there is plenty of reason to believe that this surge in solar ETFs can continue in the near term.

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