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In May, when TAN and KWT were near their peaks, we warned investors about the risks of these assets. A large number of these risks have been mitigated and on balance we feel a lot more optimistic about these ETFs. We expect most of the strong solar companies to outperform this earnings season and see TAN as a buy at this level. In May, when the solar ETFs were trading close to their peaks, we have written about Guggenheim Solar ETF (NYSEARCA: TAN ), Market Vectors Solar Energy Index ETF (NYSEARCA: KWT ) and identified the risk factors in these ETFs . At that time, TAN was trading in the $47+ range and KWT was trading in the $86+ range. Since the writing of the article, two of the risk factors materialized when Yingli Green Energy (NYSE: YGE ) and Hanergy Thin Film ( OTC:HNGSF ) collapsed causing a sector wide downdraft and triggering big losses at both the ETFs. Another risk factor in the form of solar assets also seems to have burst leading to a significant compression in the Yieldco space. At the time this article is being written, TAN was trading at $34+ and KWT at $64+. With losses around 30% from the peak, the question is if these ETFs have now reached an acceptable level of risk. To assess the current risk, we look back at the risk factors we identified earlier and review the status of the risk factors. 1. Hanergy: As we discussed earlier, Hanergy constituted about 12% of TAN and 8% of KWT. With the drop in Hanergy’s valuation prior to the stoppage of trading, and subsequent rebalancing of portfolios, Hanergy has been eliminated out of TAN but still accounts for about 2.5% of KWT holdings. However, we believe that this company is worth close to “0” and, therefore, there is still about 2.5% downside risk for KWT. 2. Solar Asset Bubble: Companies in this category include SolarCity (NASDAQ: SCTY ), Vivint Solar (NYSE: VSLR ), TerraForm Power (NASDAQ: TERP ), 8point3 Energy Partners (NASDAQ: CAFD ), and several other YieldCos. a. SolarCity remains a bubble as the macro environment for the company’s business model continues to deteriorate . In our view, fair valuation of SolarCity is likely around $15 compared to the current $57+ level. In other words, this component may have about 75% downside risk. b. The situation with Vivint Solar has now been mitigated due to its acquisition by SunEdison (NYSE: SUNE ) and TerraForm Power. As such, that acquisition along with other macro factors appears to have destroyed the valuation of SunEdison. c. For TerraForm Power, 8point3 Energy, NRG Yield (NYSE: NYLD ) and similar YieldCos, we believe the yields from these vehicles should be between 8 to 12% depending on the type of assets. These yields are for US-based assets and the actual yields should be adjusted for risk and growth potential. These yields have been increasing lately and, considering the current yields, we believe much of the Yieldco risk has now been mitigated. However, we see potential for another 25% valuation compression in this group of stocks. In spite of this additional downside, we believe this risk is substantially less than what it was at the time of our May missive. 3. Debt-laden companies: Several heavily indebted companies like Yingli Green Energy, China Sunergy (NASDAQ: CSUN ), Renesola (NYSE: SOL ), and GCL Poly ( OTCPK:GCPEF ) are likely to get reorganized, see a dramatic valuation compression, and may cease to exist altogether. While the recent downtrend at these companies have shaved off about 50% of the risk in these equities, we believe that this is just a start. We see the potential valuation compression for this group at near 100%. 4. ITC step-down risk: This risk is difficult to estimate since much depends on political action. We believe that the ITC expiration is likely to affect only a small set of US-centric companies such as SolarCity, Vivint Solar and RGS Energy (NASDAQ: RGSE ). We expect companies with strong IP (ex: First Solar) and companies with international projects to fare well post this event. The flipside of the risk argument, as we have noted before, is that strong solar companies will continue to perform well and grow. These strong companies include: First Solar (NASDAQ: FSLR ), SunEdison, SunPower (NASDAQ: SPWR ), Canadian Solar (NASDAQ: CSIQ ), JinkoSolar (NYSE: JKS ), and Trina Solar (NYSE: TSL ). The appreciation potential for this group of companies is substantial and, in many cases, may be as much as 2 to 4 times their current valuation. Each of these stocks could potentially overcome the headwinds one or more of the equities identified in the risk section above. We expect nearly all strong solar companies that we mention above to do better than guidance in Q2. The positive results could alter the negative sentiment for the sector and quickly build significant momentum in several of the names and potentially drive TAN and KWT through the earnings season. As such, we are believers of the solar growth story and we expect the growth aspects to overcome the risks in the ETF over time. While TAN and KWT are likely to be highly volatile for the 12 to 24 months, in the context of trading opportunities, it appears to us that the solar equities have taken a considerable undeserved beating in Q2 and are due for correction on the upside. Of these two ETFs, we prefer TAN to KWT and see it being a better value ahead of the earnings season. For long-term investors interested in less long-term volatility and a more solid asset growth, a better option would be to pick a basket of strong solar companies instead of investing in TAN or KWT. Our sentiment on TAN: Buy Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I am/we are long FSLR, SUNE, JKS, TSL, CSIQ, JASO. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.