Which Nuclear/Uranium ETF Should You Buy?

by: Ben Kramer-Miller

Recently I wrote an article: The Bullish Case For Uranium, in which I argue that investors should expose their portfolios to uranium, as I believe that the price will go significantly higher.

Towards the end of that article I suggest a few ways for investors to get exposure to the price of uranium. In that article I only discuss one ETF--the Global X Uranium ETF (NYSEARCA:URA), and I suggest that investors be careful in owning it because it has a lot of exposure to very small companies, some of which are not producing any uranium as of yet. In this article I discuss two other uranium/nuclear power ETFs and the circumstances under which investors should choose one over the others. In addition to URA I will discuss the Market Vectors Nuclear Energy ETF (NYSEARCA:NLR), and the iShares S&P Global Nuclear Index Fund ETF (NASDAQ:NUCL).

1: Nuclear vs. Uranium

The Global X Uranium Fund should be distinguished from the other two in that it owns uranium mining companies exclusively. The latter two funds give investors a broader exposure to nuclear energy: in addition to owning some mining companies these two funds own utility companies that utilize uranium in producing electricity. They also own industrial companies involved in the production of nuclear power.

Before choosing between the Global X Uranium Fund, or one of the nuclear power funds, one should keep in mind that the shares of uranium producers will not necessarily correlate with those of uranium users and related companies. There will be some fundamental correlation because as demand for nuclear energy increases, the price of uranium must rise to meet rising demand, and this will coincide with uranium users producing more electricity, and hence being more profitable. On the other hand uranium producers must purchase uranium in order to produce nuclear energy, and if the price of uranium rises these companies will see diminished profit margins. However this will not be that detrimental to uranium users in that the commodity itself is a relatively small input cost for these companies relative to the overall cost of producing nuclear power. Thus there are two different scenarios from which investors must choose from in order to decide which ETF to purchase.

First, the demand for nuclear power rises. If this occurs both uranium producers and nuclear power producers should benefit. All three ETFs should perform relatively well in this scenario. However, keep in mind that uranium mining (and mining in general) is a very risky business. While uranium prices will rise in this scenario uranium mining companies face the risks that are associated with mining, including:

  • rising production costs
  • environmental regulation
  • failed exploration

Consequently, investors who believe in this scenario may opt to buy NLR or NUCL as a means to mitigate these risks While NLR and NUCL hold some uranium mining companies, they almost exclusively hold only the larger mining companies. Primarily they hold utility companies, which are generally very consistent in terms of their profitability and their ability to return capital to shareholders through dividends.

Second, the demand for nuclear power doesn't rise, but the price of uranium does. As I argue in my article The Bullish Case For Uranium, many uranium mining companies are having trouble turning a profit at the current price of around $40/pound. While I also argue that the demand for nuclear power is anticipated to increase over the coming years and decades one only needs to believe in the first premise in order to be bullish on the price of uranium. Thus it is conceivable that the nuclear power producers will perform in line with utilities in general while uranium producers perform well. In this scenario one would be bullish on shares of URA, while one would need to evaluate the viability of utilities as an investment in order to justify NLR or NUCL, and such an evaluation is outside the scope of this article.

2: NLR or NUCL?

Assuming the first scenario all three ETFs will likely be good investments. I have already mentioned that URA is a high risk/high reward fund because it only invests in uranium mining companies. NLR and NUCL are similar in that they hold utility companies and industrial companies involved in the production of nuclear energy. However there are key differences, and investors who are interested in getting this kind of exposure in their portfolios should not blindly buy one or the other.

A: Expense Ratio

NUCL has an expense ratio of 0.48%, while NLR has an expense ratio of 0.6%.

B: Exposure to Uranium Miners

NUCL has very limited exposure to uranium miners at just 7%. NLR has far more exposure to uranium miners at around 34%. Thus NLR fits investment scenario #1 very well. While NUCL technically fits, it is hard to see how NUCL will benefit from the rise in the price of uranium. The following chart breaks down the sector allocations of the two funds.

Utilities 24% 62%
Miners 34% 7%
Industrials 38% 30%
Other 4% 1%

I should note that "other" in the case of NLR refers to Uranium Participation Corp. (OTCPK:URPTF), which is a holding company for uranium-based compounds.

It is clear from this data that NUCL holds mostly utilities with some exposure to industrials and minimal exposure to miners, while NLR is diversified relatively evenly between the three sectors. Since mining companies and industrial companies are often considered to be higher risk investments, NUCL is a lower risk alternative to NLR or URA.

C: Country Allocation

The two funds have their assets divided between companies located in the following companies. Investors should keep in mind that NLR's exposure to Canada and Australia is a result of its greater exposure to mining companies (URA holds almost all of its assets in Canadian and Australian companies).

Country NLR NUCL
United States 17% 38%
Canada 26% 6%
Japan 28% 26%
Australia 8% 0%
European Union 21% 24%
Asia ex. Japan 0% 4%

*The total for NUCL only adds up to 98%, as iShares provides data for only the top countries represented.

Disclosure: I am long URA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.