Can Coal ETFs Pick Up Steam In 2017?

| About: VanEck Vectors (KOL)
This article is now exclusive for PRO subscribers.

Coal-focused ETF VanEck Vectors Coal ETF (NYSEARCA:KOL) is set for an optimistic start to 2017 after around 100% jump in 2016. The black diamond has long been spiraling down due to the growing popularity of alternative energy sources. Global warming and high fuel emission issues associated with coal as well as the development of new and advanced technologies making clean power more usable curbed the demand for coal.

China, Trump's win and natural gas prices could act as a tailwind for the industry. Last year, China brought about a policy to lower its dependence on coal and cut its output to below the required amount, leading to a rally in coal prices.

On the other hand, the U.S. president-elect has promised to revive the downtrodden coal industry and scrap stringent regulations. He plans to bring back the traditional energy businesses of coal, oil and gas, and has expressed skepticism about global climate change in his campaign. So Trump's win could be counted as a boon for the industry.

Meanwhile, natural gas price is also a major influence on the space. Natural gas, a close competitor to coal, has grabbed market share in electricity generation owing to a fall in price. The fall of natural gas prices to multiyear lows was primarily due to the shale gas boom across the U.S. that led to a surge in natural gas production.

However, things are changing for the better for KOL. As per data from U.S. Energy Information Administration (EIA), natural gas inventory drawdown was beyond analyst expectations for the week ended December 23. The production cut by Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers is also supporting the natural gas prices. A rise in natural gas prices can have a positive impact on coal price.

However, export data for the industry is also not looking good. U.S. coal exports have declined in the last couple of years. This number could worsen with the fifth-largest market for U.S. coal, Canada planning to accelerate its investments in clean energy.

Although alternative energy sources - natural gas and renewables like wind and solar energy - do pose a threat to coal, it remains a dominant source of power generation worldwide. Coal accounts for more than one-third of the total electricity produced in the U.S. However, at current levels, it's getting tougher for coal to compete with cheaper natural gas alternatives.

Despite the challenges, investors buying on this Trump induced optimism can focus on the only pure play ETF targeting the coal industry.

Coal ETF in Focus

KOL tracks the MVIS Global Coal Index. Holding 28 securities in its basket, the fund is concentrated in the top 10 holdings at about 61% of the total assets. It has a China focus accounting for 23.4% of the portfolio, while U.S., Australia and Canada round off the next three spots with double-digit weight each.

The fund has amassed $101.5 million in its asset base and trades in an average daily volume of 182,000 shares. Expense ratio comes in at 0.59%. KOL has a Zacks ETF Rank of 3 or 'Hold' rating with a High risk outlook.

Original Post