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You're in Luck: There is Now an ETF Geared Toward One
of the Hottest Sectors Around |
Published: March 10, 2008
Van Eck, the
company that brought us narrow-based ETFs targeting various
sub-sectors like gold mining and environmental services, has
just launched a new fund dedicated exclusively to coal. While
Market Vectors Coal (NYSE: KOL, $39.76) is hardly suitable as a core holding, aggressive investors
may still want to reserve a spot for it.
First, the basics. The fund will track the Stowe Coal Index, a
modified, market-cap weighted benchmark of 60 companies engaged
in various coal activities, ranging from mining and production
to power generation and transportation. Like many sector funds, this one
is rather top-heavy, as the top 25 names account for nearly 90%
of the fund's assets.
According to Van Eck's website, expenses will be capped at 0.65%
through April 2008, but could potentially increase thereafter.
However, the ride has been well worth the price of admission
thus far. According to backtested data, shareholders would have
seen annualized returns of around +44% over the past three years
ended December 2007 -- capped off by a sizzling gain of +103% in 2007.
Domestic U.S. coal giants like Peabody (NYSE: BTU) occupy about 40% of the
portfolio, while most of the remainder is involved in Pacific
Rim nations such as China and Australia. This diversification
should continue paying off down the line. China is a growth
driver for many different industries -- and coal is no
exception.
Thanks to torrid economic expansion, China has an almost
insatiable demand for electricity. To meet that demand, new
power plants with the capacity to serve a city the size of
Denver are popping up at the rate of one per week. With one of
the highest consumption rates in the world, the country also has a ravenous appetite for steel. And both
power plants and steel mills are typically dependent on one
critical raw material -- coal.
According to the World Coal Institute, coal is used to produce
roughly 40% of the world's electricity and 70% of its steel. And
given the rapid industrialization taking place in China, the
country now uses more coal than Japan, the U.S. and the European
Union combined. All of this has translated into tremendous
profits for companies like Yanzhou Coal (NYSE: YZC), one of the
fund's largest holdings -- which delivered a whopping gain of
+144% last year.
On the downside, coal has come under fire from environmental
groups and others for its damaging greenhouse gas emissions, and
a transition to greener energy has begun.
But, that transition could take decades to play out,
particularly in emerging markets like China where environmental
controls are still lax. In the meantime, coal-fired plants
account for roughly 75% of China's power production, and that
figure could climb over the next few years. Furthermore, many
companies are adopting cleaner-burning coal technologies to stay
in compliance with stricter regulations.
As you can see from an average P/E of 47, coal stocks are richly
valued at the moment. That will only add to the volatility that
typically comes with investing in such a narrow slice of the
market -- particularly one that is heavily influenced by
unpredictable commodity prices.
However, global energy consumption is going nowhere but up in
the years ahead. And with oil prices surging to record highs,
worldwide demand for coal should remain strong -- particularly
in emerging markets.
Against that backdrop, aggressive investors might want to keep
KOL in mind.Good investing!
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Nathan Slaughter
Editor
The ETF Authority, Half-Priced Stocks
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