Do Solar-Powered Funds Have a Sunny Future?

In the up-and-down market of the past several years, few industries have been as volatile as solar power. As scientists try to reduce the world's dependence on fossil fuels, the sun has become one of the most promising alternative energy sources, but translating that promise into practical results has proved tricky. Solar power is still considerably more expensive than traditional power sources, and thus it is heavily reliant on government subsidies and the capital markets; however, there's lots of upside potential if and when the costs come down.

 First Solar (FSLR), the largest of the solar-power stocks, illustrates how dramatic the industry's market gyrations have been. After the firm's 2006 IPO, soaring oil prices increased interest in solar power and other renewable energy sources, and First Solar's stock rose 795% in 2007, one of several years in the past decade when solar stocks posted big gains. However, when the financial crisis slammed all risky investments in 2008, First Solar lost half its value, and many solar-power stocks lost even more. Since then, risky assets have rebounded, but First Solar and many other solar stocks have stagnated for a variety of reasons, including economic problems in Europe, the site of much of the industry's current demand because of generous government subsidies. As of Nov. 24, 2010, solar power was one of the worst-performing stock industries for the year to date.

Investors who want solar-industry exposure without buying individual stocks have several options. The most direct are exchange-traded funds such as  Market Vectors Solar Energy ETF  and  Guggenheim Solar (TAN), whose portfolios consist entirely of solar-related stocks such as First Solar. There are no open-end mutual funds with that kind of solar concentration, but a number of funds have significant exposure to the industry. The following table shows the 10 funds with the highest percentage of their most recent portfolio in solar stocks, not including those with less than $10 million in assets. We show each fund's percentile ranking in its category for the past month and the past year as of Nov. 24.

Funds With the Most Solar Power Exposure

Funds With the Most Solar Power Exposure

Most of these are "green" funds that focus on alternative energy and other environmentally friendly investments, but they're not identical by any means. The three funds with "alternative energy" in their names differ dramatically in the amount of solar exposure they have.  Guinness Atkinson Alternative Energy (GAAEX) has more than 40% of its assets in solar stocks, including six of its top 10 holdings, while  Calvert Global Alternative Energy (CGAEX) has less than half as much solar exposure. These two funds hold primarily small- and mid-cap stocks, but Fidelity Select Environment and Alternative Energy (FSLEX) is a large-cap fund whose top holdings are industrial giants such as  United Technologies (UTX) and  3M (MMM); only 5.66% of its portfolio is in solar stocks.

The two nongreen funds on the list neatly illustrate other features of the solar industry. Rydex Electronics (RYSIX) is a semiconductor fund whose top holdings are  Intel (INTC) and  Texas Instruments (TXN), and it owns several solar companies (including First Solar,  Trina Solar ,  SunPower (SPWRA), and GT Solar ) because they use specialized semiconductors to convert sunlight into electricity. ProFunds UltraChina (UGPIX) holds a half-dozen solar stocks, led by Trina Solar,  Suntech Power , and  Yingli Green Energy , reflecting the fact that low-cost Chinese producers of solar panels have been taking a lot of market share from Western competitors.

The recent woes of the solar-power industry (and alternative-energy stocks in general) have had a negative effect on these funds, eight of which rank in their category's bottom decile for the year to date. The two funds that haven't been bottom-decile performers are ProFunds UltraChina and Fidelity Select Environment and Alternative Energy, which, as noted above, holds a lot of large, diversified industrials. The flip side is that the funds on this list have the potential to do very well if and when solar stocks take off again, as they did in 2007.