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.
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.
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.
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%).
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. The fund also maintains a significant holding in financial services firms. To get daily ideas for actionable ETF plays in your inbox, make sure to sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.