Are Investors Hoping for a Coal ETF in Their Stocking This Year?

According to our ETF screener, of the ten best performing equity ETFs year to date, coal ETFs account for two of the list, both are up more than 97% in 2009. With winter fast approaching, many investors are wondering if coal ETFs can continue to power portfolio gains, or if their rally will fizzle out. Chinese demand for coal is as high as ever, but focus on the development of renewable energy alternatives remains a major threat to domestic demand. The price of coal could go much higher, or the industry could be shut out from the economic recovery, furthering America’s love-hate relationship with the energy intensive rock.

Chinese Demand

Despite record production levels within the country, China’s demand for coal continues to surge as the Chinese economy requires continuous fuel for its ongoing growth. Therefore, the Chinese must look abroad to satisfy their massive energy needs in order to keep their lights on and their steel industry growing. It doesn’t help that China’s coal-fired power stations are among the least efficient in the world, with an anemic 25% efficiency rate. This is compounded by the fact that China gets nearly 70% of its power from coal, ensuring that Chinese demand will stay relatively high for years to come.

Clean Coal

Many have lauded “clean coal” as the next step forward in America’s quest for energy independence and the reduction of worldwide carbon emissions. However, clean coal is turning into a very controversial topic, with pro-coal advocates claiming that since coal is so abundant and cheap to produce in America, we should focus our efforts on what we have and what we know works. Meanwhile, those that are against coal claim that the environmental impact and human cost is too high to justify continued coal investment given viable alternatives. If “clean coal” can become “cheap, clean coal,” it could continue to account for a large percentage of the American energy market for the long term, particularly since other fuels will likely be unable to compete on a price basis due to coal’s ubiquitous nature in most of the Mid-Atlantic States.

Alternative Energy

Following the G-20 meeting in Pittsburgh, alternative energy proposals and green technologies look to be back in focus. Not surprisingly, this could hurt coal funds going forward, since coal is usually viewed as one of the dirtiest fossil fuels. The recent “cap and trade” legislation looks to disproportionately hurt consumers and the actual burners of electricity rather than the coal miners themselves who can probably avoid most of the carbon taxes by exporting the coal to foreign countries. The EPA even wants carbon reports from the industries beginning in 2011.

A further price increase, brought on by legislation and taxation, may finally get the consumer to drop coal once and for all. After all the price of U.S Central Appalachian Coal was up nearly 300% since the beginning of the decade before falling back to more modest levels after the market crash last fall. Another sharp price increase might be just what the consumer needs, especially when coupled with generous government incentives and subsidies, (now totaling more than half a trillion dollars worldwide) to switch to alternative fuels for good.

Despite these downsides, coal is still the fastest growing fuel for six years in a row according to a study done by energy giant BP, which leaves investors with a difficult decision: whether to go long or short on coal. Investors can play coal stocks with two funds; the Market Vectors Coal ETF (KOL) or the PowerShares Global Coal Portfolio (PKOL). These two funds are very similar; both hold around 30 stocks of firms engaged in the coal industry, and their holdings have an average market cap around $3.8 billion. Both have the same top holding, China Shenhua Energy Company Limited. Major differences between the funds include KOL having a much higher portion of its assets in American firms (nearly 15% more) and a lower expense ratio (0.62% compared to PKOL’s 0.75%).

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Another way to play coal is by investing in the iShares MSCI Australia Index Fund (EWA), a diversified Australia stock fund. Australia is the largest exporter of coal in the world holding nearly33% of the export market. Australia is also is the fourth largest producer and it has massive reserves that would allow the nation to produce at its current rate well into the next century. EWA has nearly one third of its holdings in energy and industrial materials stocks, including over 14% in mining giant BHP Billiton (BHP). The fund also maintains a significant holding in financial services firms.

Disclosure: No positions at time of writing.

Comments

[Warm_Paw:]

NO
I'm an investor and I do not want a coal ETF in my stocking or anywhere near my portfolio.
Our super tankers runneth over. Why not spare the planet and reduce coal emissions.
GE is the buy - think windmills. Think electric. Think Gradnchildren - think poar bears.
Let's get away from black lung and buried coal miners.

Sep 29 01:42 PM

[Mad Hedge F...:]

erc Peabody Energy’s (BTU) CEO, Gregory Boyce, says that the Chinese buying of coal is real, not stockpiling, and expects to see a 7.5% annual growth in sales for the next five years (click here for their website ). The big demand is for metallurgical coal used to make steel, which the Middle Kingdom is importing at a record rate. Investors have already figured this out, taking the company’s stock up 400% in a year. Coal has been the fastest growing energy source in the US for the last six years, and now accounts for 50% of our electricity supply and 85% of energy generation. The problem is that the industry is target numero uno with the environmental movement, which now holds significant sway in Washington. Thanks to a 150 year lobbying effort, the coal industry has already carved out preferential treatment in the upcoming cap & trade wars at the expense of other fossil fuels. They are also pushing hard for carbon capture & sequestration (CCS), which strips the CO2 out of emissions and pumps it down to 8,200 feet underground. All eyes are now on the first such plant to come online this week in New Haven, West Virginia (click here for link to the full New York Times story ). Industry analysts say it will cost $1 trillion to convert the country’s 400 plants to generate power 30% more expensive than we are currently paying. You might also get polluted ground water and earthquakes as part of the deal. Sounds like a high price to pay to save a few union mining jobs. I vote for a natural gas based solution, which is currently coming out of our ears.

Sep 29 02:40 PM

[optionsgirl:]

The EPA has again postponed issuing permits for 79 coal miners
( for the third time). Approximately 400,000 U.S. high paying jobs are at risk. You can help. Please click here:
theburningplatform.com...

Oct 01 12:37 PM