On Friday, September 21, 2012 Nuclear Energy ETF (NLR) completed its quarterly rebalancing. This time the ETF, which tracks the DAX Global Nuclear Energy Index, made no additions or deletions to its composition. However individual company weights have been adjusted (see table below for more details):
Index Weighting on 9/20/2012
Index Weighting on 9/24/2012
US ECOLOGY INC
PALADIN ENERGY LTD
URANIUM ONE INC
TOSHIBA PLANT SY
Source: Van Eck Global, NEIG. Weights are shown as % of total NLR holdings.
While NLR is relatively small with assets of only $85 million, the fund plays an important role for nuclear energy investors. It provides sector-wide nuclear industry exposure, serves as a useful sentiment indicator and can help understand certain aspects of individual company performance:
Sector-Wide Exposure: The fund provides an opportunity to invest in a broad sector with some diversification and without taking individual name exposure. NLR has 19 constituents in 4 different regions including North America (US, Canada), Europe (France, Poland), Asia (Japan) and Australia and spans multiple industries from Mining to Utilities and Industrials. It is also one of the few ETF's with exposure to nuclear, together with Global X Uranium ETF (URA), PowerShares NUclear Energy ETF (PKN) and iShares Nuclear Energy ETF (NUCL). But unlike URA, NLR caps individual name exposure to a lower threshold, thereby limiting single name dependence. The fund also includes companies like Toshiba Plant Sys, Mitsubishi Heavy and US Ecology (ECOL), which have a relatively small exposure to nuclear compared to the overall scope of their operations.
Sentiment Indicator: NLR can often serve as a sentiment indicator. The fund typically trades close to its NAV with a 5 year average at 0.6% discount (in line with 0.6% net expense ratio). Over the years NLR typically traded at a premium during periods of investor optimism (such as rallies of late 2010 before the Fukushima accident and early 2012). Similarly, the fund usually traded at a discount to its NAV during periods when investors felt more cautious. While this is not a precise sentiment gauge, it can offer valuable insight into investor behavior.
Impact on Individual Stock Performance: It is unclear to what degree NLR affects individual name performance. From the daily trading perspective, the volume remains small relative to the trading volume of most of its individual constituents. In addition, far from every ETF trade results in an equivalent trade in an underlying. Based on our observations and consultations, most of the NLR trades are sourced from existing inventory or on the open market. However a certain NLR trade can cause trades in the underlying. These typically include:
- Creations or redemptions: In case of NLR, such redemptions or creations have been relatively infrequent and small in size, as a result the effect on individual company performance is fairly insignificant.
- Arbitragable discounts/premiums: When arbitragable discounts/premiums to NAV appear market maker or other market participants can trade a basket of individual names against the value of the ETF. Given a relatively tight premium/discount range and low trading liquidity, this strategy also does not appear to be a prevalent strategy for NLR.
- Reweighing and rebalancing: Depending on the nature of the rebalancing/reweighing, the effect on the stock performance can be fairly significant. In the case of NLR, this is particularly true for smaller, less liquid companies, such as USEC (USU) and UEC.
With so much uncertainty surrounding near term prospects for global nuclear energy, investing in NLR is not for the faint of heart. Investors should watch for improvement in industry growth expectations and a more constructive public policy environment as potential catalysts for this ETF. Meanwhile, we likely will continue to see further volatility and whipsawing performance from NLR and its constituents.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.