ETF Focus: Solar Energy

Includes: GOOG, KKR, KWT, MET, TAN
by: Tom Lydon

It has been a rough few weeks for solar energy ETFs such as Guggenheim Solar ETF (NYSEARCA:TAN) and Market Vectors Solar Energy ETF (NYSEARCA:KWT).

The sector ETFs have sold off sharply after a fast start this year.

Yet investors like Warren Buffet, Google (NASDAQ:GOOG), KKR & Co. (NYSE:KKR), MetLife (NYSE:MET) and John Hancock Life Insurance have funneled more than $500 million into renewable energy in 2011, reports Christopher Martin for Bloomberg.

Solar projects now provide returns of 15%, attracting many eager investors.

"After tax, you're looking at returns in the 10 percent to 15 percent range" for solar projects, Dan Reicher, executive director of Stanford University's center for energy policy and finance, said in the article. "The beauty of solar is once you make the capital investment, you've got free fuel and very low operating costs."

"A solar power project with a long-term sales agreement could be viewed as a machine that generates revenue," Marty Klepper, an attorney at Skadden Arps Slate Meagher & Flom LLP, which helped arrange a solar deal for Buffett, said in the article. "It's an attractive investment for any firm, not just those in energy."

Solar power is viewed as a long-term investment, similar to some bonds. Additionally, the investments also function like infrastructure projects, with cash flows comparable to toll roads, bridges or piplines, Stefan Heck, a director at McKinsey & Co. said.

Once a project is off the ground, investors can earn returns "higher than most bonds," Heck said. "There are a lot of pension funds with long-term horizons that are very interested in this space."

"Solar is now bankable," Arno Harris, chief executive officer of Sharp Corp.'s renewable power development unit Recurrent Energy, said. "When solar was perceived as more risky it required a premium," and now it's "becoming part of a much broader capital market."

According to a Wall Street Journal report, U.S trade officials have placed trade tariffs on Chinese solar panel imports of between 2.9% and 4.73% after finding Chinese solar manufacturers received unfair government assistance. The Commerce Department is also expected to rule on Chinese manufacturers exporting cells and panels below fair market price by May 17.

Guggenheim Solar ETF

(Click to enlarge)

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.