With Middle East tension driving oil prices higher, investors are again looking at alternative energy sources. ETFs that specialize in this niche have shown extreme volatility this year ... in both directions.

Today we'll take a closer look at recent action in solar energy ETFs. As you'll see, they've been all over the place in 2012. You could have made a fortune. Or you could have lost your shirt!

Solar Energy: Hot and Cold

I've mentioned solar ETFs before. Last fall I used Guggenheim Solar Energy (TAN) to illustrate The Difference between Cheap Price and Good Value. We explored TAN's surge above $300 and then its drop to $35.

How much is a good TAN worth?

(Note: TAN underwent a 1:10 reverse split on February 15, 2012, to raise its share price, so those pre-split prices discussed in the article were a high above $30 and a drop to $3.50.)

The New Year brought more fireworks for TAN shareholders. As of February 9, 2012, TAN had a year-to-date return of 52 percent. Not bad ... but this number includes two hugeassumptions:

1. You bought TAN at the 12/30/11 closing split-adjusted price of $24.70.
2. You sold TAN at the 2/9/12 closing split-adjusted price of $37.60.

If your timing was off — even a little bit — your result was probably quite different. As we know now, February 9 was the peak for TAN. Just this week, on March 6, the shares traded as low as $26.

Now the net for the whole period was still positive at +5.3 percent. Not great, but not bad for just a little over two months.

My point here is that when you see an ETF climb 50 percent or more in just a few weeks, be aware it can fall just as far, and just as fast! You had to sit through a lot to get that +5.3 percent return. Of course, if you bought TAN back on February 9, you are now staring at a 30 percent loss.

What Would You Do?

Let's dig a little deeper into the assumptions I mention above. Did you, or did anyone you know, buy TAN in late December?

Apparently not. Volume was quite low that last week of 2011. TAN's weekly trading totaled 191,297 shares. At an average price of $25, the value traded was less than $5 million — a drop in the bucket for today's global markets.

Why was no one interested? Maybe because TAN, after hitting a split-adjusted high above $81 early in the year, spent most of 2011 losing value? The solar trend was not your friend.

Is Solar a Profit Opportunity?

Where is TAN going from here? I really can't say. Some very smart people think solar energy stocks have huge potential, especially if oil prices stay high. If so, TAN could be a good way to get involved. Ditto for the very similar Market Vectors Solar Energy (KWT).

Stop or Go?

My Weiss Research associate Sean Brodrick has studied this sector closely. Right now he isn't super-bearish on solar. He just sees better opportunities elsewhere.

For my part, I look at TAN the same way I look at most ETFs: Sometimes you want to be in it, sometimes you don't. The hard part is knowing the difference!

What makes success even more elusive is that we have no universal traffic signal. You seldom know if any particular ETF is on red, yellow, or green.

I have two answers to this dilemma. They are:

• Risk-adjusted Momentum, and
• Relative Strength Ranking

I look at an ETF's current and historic volatility vs. appropriate benchmarks. Then I compare ETFs against each other. Ranking them helps me identify the best opportunities . While many could have a green light, some are probably greener than others.

Whatever your method, chasing super-volatile ETFs higher — and buying those in the bargain basement — is rarely successful. The keys to success are consistency and discipline. Add them to your strategy and watch your results improve!

Source: moneyandmarkets.com