Sunny Day For Solar ETFs Covers up Clouds

Shares of the two of 2012's most beleaguered ETFs the Guggenheim Solar ETF (NYSE:TAN) and the Market Vectors Solar Energy ETF (NYSE:KWT) are soaring today after China said it will provide $2.1 billion in assistance to prop up its flailing domestic solar industry.

TAN is up almost 10 percent on volume that is nearly triple the daily average while KWT is soaring 8.5 percent on turnover that is already five times the daily average. Today's move for the two ETFs is at least the second impressive jump in the span of less than a week. Last week, KWT and TAN surged after the China Development Bank pledged to give as much as $1 billion to the Swiss unit of ailing Chinese solar firm JinkoSolar (NSYE: JKS).

Today's news that China will prop up its solar companies comes a day after reports that the country may almost double its upper limit for solar power capacity to 40 gigawatts (GW) by 2015, Reuters reported, citing the Xinhua news agency.

The headlines have also sparked a fierce rally in some of TAN and KWT's most downtrodden constituents. JinkSolar is up 23.4 percent at this writing. JA Solar (NYSE:JASO) is soaring almost 18 percent while Trina Solar (NYSE:TSL) is higher by 19 percent. LDK Solar (NYSE:LDK) is up 19.2 percent. All of those names have made those gains on volume that is well above the respective daily averages.

Jinko and Trina are top-10 holdings in TAN while Trina is KWT's eighth-largest holding. Interestingly, the rally in Chinese solar names over the past week has help KWT and TAN outperform their largest holding First Solar (NASDAQ:FSLR) by wide margins over that time frame.

First Solar, the largest U.S. solar company, has gained just 10.7 percent over the past week. That puts the stock more than 500 basis points behind KWT and more than 700 basis points behind TAN over the same time. TAN devotes nearly 10.3 percent of its weight to First Solar while the stock represents 15.9 percent of KWT's weight.

First Solar's market value is nearly $2.9 billion. Said another way, adding up the market caps of LDK, JinkoSolar, JA Solar, Trina and Yingli Green Energy (NYSE:YGE) does not even come close to First Solar's market cap. Translation: KWT and TAN are not being driven higher by their largest holding, that being first solar. Rather the two ETFs are dogs being wagged by the tail that is a collection of small, and in some cases, micro-cap stocks.

Beyond the fundamental concerns facing the solar industry outside of China, chief among them being slack demand in many markets and crimped subsidies in Europe is another issue that KWT and TAN may have to contend with. That being First Solar's tenuous grasp on S&P 500 membership.

In the SPDR S&P 500 (NYSE:SPY), First Solar is tied with six other stocks with a scant weighting of just 0.01 percent. Fortunately, for First Solar, only AutoNation (NYSE:AN) and Titanium Metals (NYSE:TIE) have large market caps. Unfortunately for First Solar, there are dozens of U.S.-based companies with a larger market caps that are not S&P 500 members. Service Corporation International (NYSE:SCI), Babcock & Wilcox (NYSE:BWC) and Graco (NYSE:GGG) to name a few.

All of this is to say that if solar stocks return to form and struggle again and First Solar's market value tumbles, the stock is a candidate for expulsion from the S&P 500. The subsequent selling pressure by fund managers that benchmark to the S&P 500 would likely pressure KWT and TAN to an extent that the likes of LDK, Trina and friends could not prop these ETFs up.

For now, solar bulls can enjoy the spoils of short-term victory, but the smart members of that group will treat KWT and TAN as trades, not investments.

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