Commodity Fund That Tracks Global Coal Price

Includes: KOL, PKOL
by: Mike Havrilla

The accompanying table (click to enlarge) contains a summary and statistics for 16 ETFI global equity indexes and two commodity pool fund ideas, with the short/inverse and defensive themes outpacing the overall market averages over the past year in the midst of ongoing market turmoil around the world.

Although currently out of favor with investors, new commodity pool fund ideas include timber and coal. The CoalFund is a commodity pool that is structured to track the performance of exchange-traded, near-month futures contracts for global coal prices from the following four major coal-producing/exporting regions in the world as specified below.

1.) United States (40% - 70%): NYMEX Central Appalachian Coal Futures (QL)
i.) Western Rail Powder River Basin Coal Swap Futures (QP)
ii.) Eastern Rail CSX Coal Swap Futures (QX)

2.) Europe (15% - 30%): Intercontinental Exchange (ICE) Futures Rotterdam (ATW)

3.) South Africa (15% - 30%): ICE Futures Richards Bay (AFR)

4.) Asia (up to 25% when issued) (Newcastle, Australia):
i.) ICE Futures – globalCOAL NEWC Index
ii.) ASX Thermal FOB Newcastle

Given the success of the company-based Market Vectors Coal ETF (NYSEARCA:KOL) and recent launch of PowerShares Global Coal ETF (NASDAQ:PKOL), a CoalFund would provide investors with direct exposure to the global price of this important energy commodity in a similar fashion to the U.S. Oil (NYSEARCA:USO) and Natural Gas (NYSEARCA:UNG) Funds, which have over a $1B in net assets each and heavy trading volumes.

Given the global economic slowdown, lower commodity prices, and the cool-down in former red-hot growth markets such as China, the short indexes for passenger airlines, auto makers, maritime transport, and trucking/logistics companies posted very strong results, gaining between 27%-57% in the past year. While I am still bullish on the prospects for railroads as a long investment idea and a hedge to these short transport ETF ideas, they will also suffer to some degree depending on the length and depth of the slowdown.
However, the railroad industry is more fuel efficient than trucking, is not plagued by overcapacity, and also enjoys pricing power as there is a limited amount of railroad track and little ability to add new tracks in the U.S.

In the healthcare sector, both presidential candidates are bullish on Health IT spending as part of their healthcare reform proposals, with an estimated savings of $88B to the country over 10 years. While details of these plans are lacking; Senator Obama's proposal would include a $50B investment in Health IT, divided evenly over a five-year period, making this a bullish segment of the healthcare sector which also posted positive returns over the past year.

Another bullish segment in healthcare is the rapidly consolidating generic drug industry, which has recently attracted the interest of Pfizer (NYSE:PFE) which plans to begin selling off-patent drugs beyond its in-house Greenstone generic division. A wave of brand names representing $70B in sales are due to come off-patent through 2012 and there is also a push to increase generic substitution rates to save money for consumers and third-party payers.

Other defensive industry groups represented in the table include tobacco and telco services, with average dividend yields of 5.6% and 9.3%, respectively. Also, the ETFI Highly Defensive PerformIdex includes 40 companies with market caps of at least $10B and is over-weighted in large and mega-cap consumer staples and healthcare companies based in North America and Europe.