Why Solar ETFs Are Rallying

Solar exchange traded funds are expected to perform better this year as policymakers have found some resolution for the U.S. fiscal cliff and industry consolidation and investment takes place. The industry is evolving and is slowly finding ways to reduce costs while increasing efficiency.

"Recent concerns about high fossil-fuel prices, global warming, and a questionable ability to meet growing long-term electricity demand have galvanized widespread interest in the renewable energy industry. Throw in government tax subsidies for electricity production and alternative energy implementation, strong global demand, and state-mandated renewable portfolio standards in the United States, and the near future has the potential to be prosperous times for alternative energy producers and developers alike," Abraham Bailin wrote for Morningstar.

The global solar industry got burned in 2012, however, this year focused ETFs have performed well and are forecast to provide strong gains this year. The Guggenheim Solar ETF (TAN) gained 13.5% so far, while theMarket Vectors Solar Energy ETF (KWT) has gained 11.6% year-to-date.

It appears that China is leading the path in the growth of the solar energy industry. The recent decline in the cost of developing solar technologies will help boost growth in the solar sector in China and other untapped markets, reports Zacks Equity Research. Also, China is putting another $1.1 billion in subsidies to the sector, double of what the government has already put in. In turn, the Chinese solar export market should heat up again, after being left with excess capacity and low demand.

Furthermore, solar projects are up and running in the Middle East, with about $6.8 billion invested into projects in countries such as UAE, Kuwait, Egypt, Jordan and even Morocco.

President Obama is also expected to help drive the performance of the solar power industry. He has been a long time supporter of alternative and solar power , and is expected to push alternative energy sources hard during his second term.

Lastly, the possible takeover of First Solar (FSLR) has been a boon for the sector as share prices for the stock are up 5.8%, reports Benzinga. First Solar is the largest U.S. solar power company, and rumors that General Electric (GE) has the company in its sights has bode well for the industry. TAN gives 8.74% to FSLR while KWT allocates 8.14% of assets to the stock.

Guggenheim Solar ETF

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Tisha Guerrero contributed to this article.