Too Much Sun and Not Enough Green

Wall Street is the place to find all sorts of investments you never knew you needed. If a segment of the stock market can be sliced, diced, or julienned, you can count on the professionals to come up with a way to do it.

But often, Wall Street releases new investments just when they've reached their peak. One example from recent times is solar energy, where an exchange-traded fund that provides one-stop shopping to interested investors has hit tough times.

A bright outlook?
As fellow Fool Zoe Van Schyndel noted last year, Claymore Securities listed the Claymore/MAC Global Solar Energy ETF (TAN), which invests exclusively in companies that provide solar energy products and services.

I agree that solar energy is a promising area and that it may become a more integral part of our lives in the coming decades. But those who looked to get a little sun with this particular ETF have gotten seriously burned, because the fund is down 68% in the past year. Consider the performance of some of its top holdings:

Stock	1-Year Return
First Solar (Nasdaq: FSLR  )	(43.6%)
Suntech Power (NYSE: STP  )	(60%)
Canadian Solar (Nasdaq: CSIQ  )	(76.4%)
MEMC Electronic Materials (NYSE: WFR  )	(72.6%)
SunPower (Nasdaq: SPWRA  )	(67.6%)
LDK Solar (NYSE: LDK  )	(75.2%)
Yingli Green Energy (NYSE: YGE  )	(35.2%)

Source: Morningstar. As of June 22.

In general, very narrowly focused funds like this one simply don't provide enough diversification for the average investor. Most investors don't have a strategic reason for owning sector-specific funds, but are lured by the promise of outsized returns. Investing heavily in one sector in the hopes of boosting portfolio performance just isn't a good bet.

Sector funds are notoriously volatile -- often prone to wild swings in performance from quarter to quarter. As you can see, if you got into a sector fund at the wrong time, like at the peak of the market cycle for that sector, you were in for a world of hurt. Besides, with an expense ratio of 0.79%, this particular solar ETF is much more expensive than your average broad market exchange-traded fund.

If you really have your heart set on the solar sector, you might want to check out some of the "green" mutual funds that include solar energy companies among their holdings, but also branch out into other environmentally friendly areas. Although these funds have also suffered big losses, they're not down as much as solar-sector funds.

More diversified green funds are a better way of getting into a solar energy play, without taking on huge amounts of risk to do so. Thinking more broadly means there's much less chance you'll end up getting sunburned when it comes to your portfolio.

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