Are Coal ETFs Back on Track? - ETF News And Commentary
October 16 2012 - 6:39AM
Zacks
The first three-quarters of the year were a time period to
forget for the coal industry as worries began to cascade over the
sector. The space was greatly impacted by weakened demand prospects
from China, while global growth concerns in the rest of the world
didn’t help matters much either.
Furthermore, the low price of natural gas for much of the time
period in question made coal unappealing to a number of power
plants, as natural gas is often considered a cleaner source of
power. Couple this was the gloomy economic situation and investors
had a recipe for disaster in the coal industry for much of the
year.
This doom was best demonstrated by the total collapse of Patriot
Coal in mid-July of this year. The firm was a $24 stock in 2011,
but declared bankruptcy midway through 2012, pulling down a number
of weak coal stocks in the process (read Three Low Beta Sector
ETFs).
This was no better from an ETF look either, as the two coal
ETFs, the Market Vectors Coal ETF (KOL) and the
PowerShares Global Coal Portfolio (PKOL) were both
decimated by these events. In fact, both funds are down double
digits this year with both losing at least 18% so far in 2012.
Yet while the sector has had terrible long term performance,
there is some hope that the space is finally bottoming out now that
many of the weaker players have fallen by the wayside. Both KOL and
PKOL are up more than 4% so far in the fourth quarter, beating out
most other products in the process and suggesting that coal may be
back on track from an investment perspective (read Is Now The Time
to Buy the Coal ETFs?).
What’s Changed?
First, there has definitely been some bottom fishing in the coal
sector to start the fourth quarter. After all, coal, despite the
issues in the area, is a very necessary component of global power
systems and it is unlikely to be going anywhere in the near future.
While alternatives are likely to make up a bigger piece of the
energy pie, the fact remains that much of the world runs on
coal.
Beyond that, some mine idling in a number of areas around the
country could reduce supply in the near term, helping to keep
prices relatively high. Coal prices have seemingly hit a bottom on
a per short ton basis, as they have had significant difficulty
breaking below $50/st in thermal coal CAPP terms over the course of
the year.
Lastly, from a political perspective, there is now some hope
that Romney could win the White House, potentially giving the
industry someone who is more pro-coal in the top position in the
country. Given this new found optimism over the Romney campaign,
some investors are willing to get back into coal stocks in hopes
that his potential administration might be friendlier to the
industry at large (see Does Your Portfolio Need a Coal ETF?).
All of these factors have combined to make coal’s outlook a
little brighter heading into 2012’s homestretch. Thanks to this,
investors may want to consider taking a closer look at the two
aforementioned coal ETFs at this time, each of which we have
briefly highlighted below:
PowerShares Global Coal Portfolio (PKOL) - This
ETF charges investors 75 basis points a year in fees and holds 27
stocks in its portfolio. Volume is a tad low suggesting modest bid
ask spreads, although the yield is reasonable at 2.1% in 30 Day SEC
terms (see The Truth about Low Volume ETFs).
In terms of country exposure, the U.S. accounts for 31% of
assets, while China and Indonesia round out the top three with
exposures of, respectively, 24.5% and 17.9%. For market cap levels,
large caps make up the most by a slim margin, although roughly 40%
is also included in mid caps, giving the fund a nice tilt towards
smaller securities.
Market Vectors Coal ETF (KOL) - This ETF also
focuses in on the global coal industry holding 35 securities in its
basket and charging investors 59 basis points a year in fees for
its services. This product sees more volume than its PowerShares
counterpart, thanks in large part to its solid AUM of $222 million
(read the Three Biggest Mistakes of ETF Investing).
The U.S. again accounts for the top spot, but does so with
roughly 38% of assets, followed by an 18% holding for Canada, and
then 10% weights for both Indonesia and Australia. From a cap
perspective, large caps take up roughly 50% of assets while mid
caps make up another 43% of the fund.
It is also worth pointing out that KOL currently has a Zacks ETF
Rank of 3 or ‘Hold’, suggesting that the fund will be a decent
choice in the medium time frame.
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MKT VEC-COAL (KOL): ETF Research Reports
PWRSH-GLBL COAL (PKOL): ETF Research Reports
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