2010 brought terror to the energy sector, as the year started off with the Deepwater Horizon spill, sending energy equities across the board into a free-fall. Despite this tragedy, some analysts felt that they vast amounts of oil that had spewed into the Gulf of Mexico would finally force the U.S. government to make a push for cleaner energy. Investors in clean energy had similar hopes, but all to no avail; clean energy finished out the year as one of the worst sectors by far. But with our demand for fossil fuels constantly growing, and our supply steadily shrinking, there may come a day when we have no choice but to adopt numerous alternative energy sources. As the economic situation has improved around the world, investors have begun to bid up the price of oil once again, putting renewed focus on alternative forms of energy. This has pushed many ETFs in the sector sharply higher so far in 2011, but it has been especially kind to one form of alternative power: Solar [see also Ten Worst Performing ETFs of 2010].

Though we are just a few short weeks into 2011, solar energy has already emerged as one of the front-running ETF sectors, with gains topping 10% in just three trading weeks. But after 2010 was such a rough year for many of these funds, the recent surge has left investors scratching their heads. A closer look into the solar industry helps shed some light on some of the reasons these ETFs are performing so well in such a short period of time.

Solar Industry in Focus
To start things off, the world's largest solar energy project was recently offered a loan totaling just under $1 billion U.S. dollars. Construction on the Agua Caliente Solar Project began in 2010, and it is expected to be complete by 2014 in the desert of Arizona. The project, headed by NRG Solar, will be exclusively using photovoltaic modules produced by First Solar (Nasdaq: FSLR). The project will create more than 400 jobs, and "will avoid 237,000 metric tonnes of greenhouse gas emissions per year, equivalent to taking more than 40,000 cars off the road annually," writes Carmen Doyle. Already, Pacific Gas & Electric company has entered into a 25 year contract with NRG to purchase power generated from this robust plant.

Another announcement recently surfaced that nudged solar energy in the right direction. Prime Time Produce, "the largest grower, packer and shipper of sweet peppers -- those red, green and yellow ones -- in the United States," revealed the installation of solar modules that will supply almost all of its power needs during peak hours, and more than enough in the off-season reports Amanda H. Miller. The solar panels will generate enough energy to power the massive 75,000 square foot packaging plant. The installation of these panels gives two benefits to Prime Time: attractive cost benefits, and they are environmentally friendly. The clear cost efficiency that photovoltaic modules provide is starting to catch on, even for smaller sized businesses, a trend that may continue for the duration of 2011 and help to boost demand across the sector [see also Why Clean Energy ETFs Are No Slam Dunk].

Thanks to reports like these from medium-sized companies suggest that the industry could be in for a great year, even despite a possible slowdown in Germany. In fact, some are predicting that worldwide solar installations will hit 19.3 gigawatts in 2011, representing substantial growth over the 15.8 GW level in 2010. A big part of this predicted increase comes from tax legislation right here in the U.S. The 1603 Treasury Grants were extended in late December of 2010, which allow investors in commercial solar projects to recoup their tax rebates upon completion of projects instead of having to wait until the filing date to do so. This could help keep cash flowing quicker in the industry and potentially lead to more projects, as well.

Lastly, solar industry advocates are also cheering the large number of RPS (renewable portfolio standard) plans that are hitting the market all across the country. These documents require utilities to produce or obtain a specified percentage of their electricity from renewable sources, basically forcing companies to buy alternative fuels. Close to 30 states already have such programs in place, while seven more have RPS goals suggesting that demand will soon be there for renewables of all types here in the U.S., and that it is unlikely to go away any time soon.

Amidst all of this positive news for the solar industry, ETFs tracking these companies are looking bright. Below, we outline two ETFs for investors to take advantage of the current jump in solar energy [see also Gust of Activity Puts Wind ETFs in Focus].

Market Vectors Solar Energy ETF (NYSE: KWT)
This fund measures the Ardour Solar Energy Index, which provides exposure to publicly traded companies from around the world that derive at least 66% of their revenues from solar power and related products and services. The fund's top holdings include Trina Solar (NYSE: TSL) (10%), First Solar (9.8%), and JA Solar Holdings (5.4%). KWT takes a more international stance when it comes to its securities, with just 28% of its assets dedicated to the U.S., the rest of its holdings fall into countries like China (32.9%) and Germany (17.3%). The fund has gained over 13% in 2011 alone but is still down 11.5% over the past 52 weeks [see charts of KWT here].

Guggenheim Solar ETF (NYSE: TAN)
TAN seeks to replicate the performance of the MAC Global Solar Energy Index, which is designed to track various companies from all around the solar industry. The fund's top holdings are First Solar (19.4%), Trina Solar (6.5%), and Renewable Energy Corporation (6%). TAN holds roughly half of its assets in the U.S., and the rest are focused on various nations, including China (26.7%) and Germany (16.6%). From a performance standpoint, TAN has gained 10.4% on the year, which is in sharp contrast to its 52 week performance of -14.2%. TAN may be a better choice for investors who prefer more U.S. exposure, though for the time being, China is the most competitive nation in the solar industry, possibly giving KWT a leg up in terms of allocations to this rapidly expanding market [see more of TAN's holdings].

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Disclosure: No positions at time of writing.

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