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While scientists fight it out over climate change; i.e. what the damage is, whos causing it, and what to do about it, investors are looking to make hay on solar energy ETFs. Its one of the most highly-funded investment areas by world governments, and those investments are expected to rise substantially in the next year – and well into the next decade, energy analysts say.

While solar stocks have fallen dramatically in 2011, mainly due to industry volatility and the unwillingness of investors to hang their hats on stocks sectors they deem to immature and risky (and solar certainly qualifies), the industry’s long-term growth tells a better story  and we have the scoop.

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Solar stocks performance – June, 2011

Solar Stocks = 17.18%

Standard & Poor’s 500 = +6.02%

Johnny-Come-Lately

Maybe the best way to look at the solar sector is as a ‘late bloomer”.

That’s the term some analysts use to describe solar, and the term has merit. The U.S. solar market recently passed two gigawatts of power for the first time ever and is the “fastest-growing industry in the U.S.”, says Rhone Rsech, president of the Solar Energy Industry Association .

The SEIA has the data to back that sentiment up. According to a new report from the association, installations are on the rise; manufacturing growth is up significantly; and prices to buy solar products are becoming more reasonable for providers and for consumers.

This from the SEIA on June 16, 2011:

Fresh data on the solar energy market

• New solar installations are up 66% from 2010

• Installed solar installations = 2.85 GW – enough to power 570,000 U.S. homes

• Total growth of U.S. solar market (by revenue) = 67%

• Solar manufacturing growth +31% in 2010

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How To Play the Solar ETF Market

Another study, this one from the research firm Clean Energy , pegs the current value of the solar photovoltaics market at $71.2 billion – that’s up from $2.5 billion in 2000, and has a compound annual growth rate of 39.8%.

Clean Energy says that it’s time for solar stocks to really take off:

Ask any energy analyst, though, and he or she will likely say that solar power is a very young, fragile, and unsettled industry. That’s why solar ETFs may be your best bet to play the solar market. Buying up shares of direct solar company stocks is a bit of a guessing game. After all, who knows which industry technologies will win out in the end? Silicon panels? Thin-film technologies? High-grade plastics that are cheap and easy to produce?

Turning to a solar energy ETF spreads that risk around and allows you to benefit from the wisdom of money managers who closely track the solar industry. Before you dive in head first, take these tips into the solar ETF market with you:

• Focus on ETFs with a technology bent – As the above data attests, demand for solar energy will rise substantially over the next decade. That’s why it’s vital to vet any solar ETFs for portfolio companies that already have a track record of technology achievement in the field. Look to the research and development side of the companies you want, then make sure your ETF has a good portion of them.

• Examine cash flows – Take a few solar ETFs and break out the portfolio holdings. Then break them down further and focus on key fundamentals like cash flow, profit and loss, and a good track record of growth. Many solar energy firms are relatively young. So fundamentals are a big priority.

• Avoid high debt – Sure, young solar companies tend to take on some debt. But a closer look should be taken to see if the companies in the ETF you’re considering have exceedingly high debt. Focus on debt/equity ratios and avoid any ETFs loaded with companies where such ratios are out of whack.

• Have the patience of a saint  Despite the recent volatile returns of solar energy stocks – up in 2010 and down in 2011 – try to take a long-term view with solar ETFs. Many solar energy firs are just getting started, and are busy spending capital on equipment, leases, and employees. Don’t look to get rich on solar within two years – it will take longer than that, but the long-term upside is immense.

Key Solar ETFs

The solar ETF sector is fairly concentrated, with these three funds garnering the most investor money  and the most attention:

Guggenheim Solar (Stock Quote: TAN) The three-year average return on TAN is hideous – at -35.30%. But things have stabilized, as the 2011 YTD numbers are at 2.60%. The ETF tracks the MAC Global Solar Energy Index and there is some good news there. First Solar, a big component of the Guggenheim ETF (at 14.43%), was recently approved for $4.5 billion in funding from the U.S. Department of Energy.

Market Vectors Solar Energy (Stock Quote: KWT) The Market Vectors Solar Energy ETF tracks the Ardour Solar Energy Index, SOLRX. According to its prospectus, the index is aimed at “a select group of companies around the world that derive at least 66% of their revenues from solar energy.” The ETF is trading between $10.50 and $13.50, at the lower end of that band in early July.

iShares S&P Global Clean Energy Index (Stock Quote: ICLN) – The iShares ETF shows the best 2011 YTD performance, at 7.45% through July 5. It’s not as solar-specific as Guggenheim and Market Vectors. The fund tracks the S&P Global Clean Energy Index, where 90% of its assets come from. That index is comprised not just of solar, but also biofuel and biomass, ethanol and fuel alcohol, geothermal energy, hydroelectricity, and wind energy.

Profits Off the Grid?

The solar industry is a young one, and has had its share of missteps, false starts, and sidelined promises. But the long-term potential, given the high price of oil and gas, may well be off the charts – and off the grid.

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