The nuclear industry is experiencing a renaissance with improved technology and with strong pressure for electricity that is generated without the greenhouse gas emissions and air pollution associated with fossil fuel power plants.
Much of the demand for new nuclear power plants is in the developing world such as China, India and Russia. Across the world, there are 58 nuclear power plants that are under construction and will come online within 0-7 years, 148 plants that are planned and that will be online in 8-10 years, and 331 plants that are expected to be proposed and in operation within 15 years, according to the World Nuclear Association. In China, there are 23 plants that are currently under construction, 39 plants that are in the 8-10 year planning stage, and 120 plants that are expected to be in operation within 15 years.
This report will analyze the four ETFs that provide exposure to the nuclear and uranium industries. We will first provide a short overview of each ETF.
Market Vectors Uranium and Nuclear Energy ETF (NLR) – This fund, launched in August 2007, has $260 million in assets under management. The fund has an expense fee of 0.62%. The fund is based on the DAXglobal Nuclear Energy Index, which is a modified market cap weighted index of globally-listed companies engaged in the nuclear energy industry. The sector breakdown is uranium mining (38.5%), nuclear generation (24.0%), plant infrastructure (17.4%), nuclear fuel transport (6.6%), uranium enrichment (4.7%), nuclear conglomerate (4.5%), and uranium storage (4.4%). The country breakdown is Canada (29.30%), U.S. (27.20%), Japan (17.40%), France (12.50%), Australia (12.30%) and South Africa (1.30%). The market cap breakdown is 37% large-cap (>$5 billion), 29% medium cap ($1.0-5.0 billion), and 34.3% small cap (<$1 billion). The top holdings are Constellation Energy Group (CEG) (8.58%), Exelon (EXC) (8.34%), EDF SA (8.09%), Cameco Corp. (CCJ) (7.83%), and Paladin Energy (OTC:PALAF) (7.56%).
Global X Uranium ETF (URA) – This fund, just recently launched in November 2010, has $155 million in assets under management. The fund has an expense fee of 0.69%. The fund tracks the Solactive Global Uranium index. The fund holds 24 globally-listed stocks of companies that are primarily engaged in some aspect of the uranium mining industry, such as mining, refining, exploration and manufacturing of equipment for the uranium industry. The country breakdown is Canada (51.01%), Australia (28.31%), U.S. (12.26%), U.K. (4.76%) and South Africa (3.43%). The fund’s top holdings are Cameco Corp (17.42%), Uranium One (OTC:SXRZF) (15.48%), Paladin Resources (10.76%), Denson Mines (5.48%), Uranium Energy (UEC) (4.68%).
PowerShares Global Nuclear Energy Portfolio (PKN) – This fund, launched in April 2008, has only $37 million in assets under management. The expense fee is 0.75%. The fund is based on the WNA Nuclear Energy Index, which tracks globally-listed companies engaged in the nuclear energy industry with representation across reactors, utilities, construction, technology, equipment, service providers and fuels. The top holdings are Areva (OTC:ARVCF) (7.87%), Toshiba (OTC:TOSBF) (5.48%), Uranium One (3.50%), E.ON AG (OTCQX:EONGY) (3.20%), and Thermo Fisher Scientific (TMO) (3.08%).
iShares S&P Global Nuclear Index Fund (NUCL) – This fund, launched in June 2008, has only $17 million in assets under management. The expense ratio is 0.48%. The fund is based on the S&P Global Nuclear Energy Index. The fund holds 25 globally-listed stocks with the top holdings being Cameco (8.93%), Mitsubishi Electric (OTC:MIELY) (8.44%), AMEC Plc (OTC:AMCBF) (8.20%), E.ON AG (7.72%), and Mitsubishi Heavy Industries (OTC:MHVYF) (6.89%).
Our “Best in Class” choice for the uranium/nuclear sector is the Global X Uranium ETF (URA). The investment goal in this sector is to get the closest possible exposure to the profit potential from the expansion of the nuclear power industry. In our opinion, the best way to obtain this exposure is through the raw feedstock material for the nuclear power generation industry - uranium. The best ETF for doing this in our opinion is the Global X Uranium ETF.
Market Vectors Uranium and Nuclear Energy ETF (NLR) has more assets under management than URA, but NLR in our opinion has too much weight on utilities (e.g., Constellation Energy, Exelon, EDF SA) and industrial conglomerates (Mitsubishi Heavy Industries, JGC Corp, Toshiba Plant Systems & Services Corp) where nuclear power represents only a minor part of their businesses. In addition, it makes little sense to us to invest in a utility that uses nuclear power as a primary part of its generation mix because an investor is mainly gaining exposure to a utility business model (which is usually a regulated industry with capped profits) and is not getting any real benefit or exposure from the larger theme of the expanded construction and operation of nuclear power plants.
PowerShares Global Nuclear Energy Portfolio (PKN) and iShares S&P Global Nuclear Index Fund (NUCL) both suffer from the same problem of too much exposure to utilities and conglomerates. In addition, their assets under management are below our usual $50 million cut-off for recommending an ETF.
Figure 1: Global X Uranium ETF (URA) versus Market Vectors Nuclear ETF (NLR) and Uranium Futures Prices:
Click to enlarge
The ability of the Global X Uranium ETF (URA) to gather assets so quickly attests to its success in capturing the essence of investing in the uranium/nuclear industry. In just a few months, URA has shot above $100 million in assets under management, which is an excellent start for a new ETF. In addition, as seen in Figure 1, URA has substantially outperformed NLR since its launch last November. URA is therefore our “Best in Class” choice for the uranium/nuclear sector.