One Problem For Solar ETFs No One Is Talking About

The ugly fate of solar stocks and the corresponding ETFs has been lamented plenty of times in recent months. Chinese solar companies are not only cannibalizing each other with low prices, they're doing the same to their U.S. rivals. Not to mention, U.S. solar companies have been unable to flourish despite President Obama being an unabashed fan of alternative energy. Factor in the slashed solar subsidies in Europe against the backdrop of the Euro Zone's sovereign debt crisis and it's no wonder the Guggenheim Solar ETF TAN is down 71.1% in the past year. The rival Market Vectors Solar Energy ETF KWT is off 72.5% over the same time frame. There's another issue to be aware of with TAN and KWT and it involves First Solar FSLR. First Solar, the largest U.S. maker of solar panels, is a member of the S&P 500, believe it or not. It entered the broad market index in October 2009. At this point, it appears doubtful that the stock will be able to celebrate three yeas as an S&P 500 constituent. First Solar's current flirtation with $18 means the stock is trading below its 2006 IPO price of $20. It also means the company has a market cap of $1.62 billion. That's good for the second-lowest market cap in the S&P 500. Only Supervalu SVU has a lower market cap among S&P 500 components. Guess what's happening to Supervalu? It will be expelled from the S&P 500 when Philips 66, the soon-to-be refining spinoff of ConocoPhillips COP, commences trading on May 1. That means unless First Solar shares start rallying soon or another S&P 500 member falls off a cliff, the stock is next in line to be bounced from the S&P 500. Should that happen, a viscous circle starts for First Solar because S&P 500 tracking funds, mutual funds and ETFs, will be forced to sell their stakes in First Solar to ensure they are accurately tracking the index. Indeed, there are some companies that meet the S&P 500's market cap criteria that are not yet part of the index. For example, LinkedIn LNKD with its market cap of over $10 billion comfortably qualifies for S&P 500 membership and would arguably make for a suitable replacement for First Solar. Obviously, that's not good news for the stock. It's not good news for TAN and KWT, either. First Solar is TAN's second-largest component with a weight of almost 9.1%, according to Guggenheim data updated on April 24. First Solar is KWT's third-largest holding with a weight of 8.76% as of April 24. In the essence of fairness, Standard & Poor's has not publicly said First Solar is at risk of S&P 500 expulsion. However, common sense says the risk is real and that means more downside risk to the already downtrodden TAN and KWT. For more on solar ETFs, please click HERE.