What Ever Happened to Coal ETFs?

by on April 7, 2014 | ETFs Mentioned:

During both of President Obama’s election campaigns, energy seemed to be one of the hottest topics of debate. Both sides of the political fence argued for continued growth and expansion of the U.S. energy industry; the ideal means of achieving this goal, however, were quite different according to each candidate [see Energy Equity ETFs: 4 Things To Consider].

Coal, in particular, faced significant scrutiny from Obama’s administration. Subsequently, investments in the coal industry have faltered in recent years, and so has the only ETF offering targeted exposure to the commodity – the Market Vectors Coal ETF (KOL, B).

KOL Stuck in a Rut

Van Eck‘s KOL made its debut in January of 2008, and it is still the only fund available that specifically targets the coal industry. The ETF tracks the Stowe Coal Index, which invests in publicly traded companies worldwide that derive greater than 50% of their revenues from the coal industry. The resulting portfolio features 75 individual holdings, split relatively equally among U.S. foreign stocks.

From a performance perspective, KOL has suffered several tremendous losses over the years. From 2011 to 2013, the fund has posted double digit annual losses. Its single worst quarter, however, came in 3Q of 2008 when KOL shed 50.15%. Below is a graph depicting the growth of a hypothetical $10,000 investment in KOL since the fund’s inception on January 10, 2008 (Note: Returns reflect capital appreciation and the reinvestment of dividends and capital gains, if any, as well as all fees and expenses. Data as of 3/31/2014):

Source: Van Eck

Source: Van Eck

As shown above, a $10,000 investment made in KOL at inception would now have a value of roughly $5,000 – a 50% loss on the investment. Not surprisingly, KOL also saw tremendous asset outflows during the large dips seen in 2008 and 2011. Currently, the fund has below $150 million in total assets under management and an average daily trading volume of 125,174 shares  [see 101 ETF Lessons Every Financial Advisor Should Learn].

The Headwinds: Politics, Environmentalists, Big Oil, and Natural Gas

According to the U.S. Energy Information Administration (EIA), the U.S. holds the world’s largest estimated recoverable reserves of coal, and it is a net exporter of coal. Over the last 60 years, coal has been the largest source of electricity generation. The fossil fuel’s annual share of total net generation, however, has declined from roughly 50% in 2007 to 37% in 2012.

coal consumption

Environmental Concerns

One of the contributing factors to the decline of coal demand has been environmental concerns. In recent years, developed countries have attacked the fuel source for its negative environmental impact. The so-called “dirty” energy source is known for producing several types of harmful emissions, including sulfur dioxide, nitrogen oxide, heavy metals (such as mercury and arsenic), and acid gases (such as hydrogen chloride), which have been linked to acid rain, smog, and health issues. Coal also emits carbon dioxide, a greenhouse gas.

Politics

The environmental concerns have really only been put into the spotlight in recent years, after the last two presidential elections focused heavily on the energy and coal industry. During the last presidential election, U.S. coal mining stocks briefly went higher after Mitt Romney made several comments regarding his support for the industry – analysts dubbed it the “Romney Rally.” After President Obama was re-elected, however, the industry once again slumped after Obama vowed to impose costly new emission controls. Supporters of the coal industry have dubbed the President’s push for more restrictions as “Obama’s War on Coal” [see How To Pick The Right ETF Every Time].

Big Oil & Natural Gas

With rising costs to reduce harmful emissions, electricity companies have recently turned to alternative sources of energy, which are reportedly “safer” than coal. The demand for nuclear, solar, wind, and natural gas energy for electricity generation has risen significantly in recent years. Natural gas demand for electric power generation, in particular, has skyrocketed – thanks in part to controversial fracking technologies and relatively low NG prices. The EIA estimates natural gas electric power generation to surpass coal generation by 2035. Not surprisingly, big oil companies have jumped on this trend – investing billions of dollars into expanding natural gas exploration.

Potential Bright Spots

One of the driving forces behind coal consumption today is the number of of emerging markets that still heavily depend on coal for their energy needs. China, in particular, relies on the commodity, consuming nearly three times that of the U.S. on an annual basis. These markets will likely continue to use the “dirty” energy source because of its abundance and low cost.

china coal

Click to Enlarge

Another potential bright spot for the coal industry has been the tremendous amount of research put into lowering the costs and improving the efficiency of  of various carbon capture and storage (CCS) technologies, with a goal of capturing approximately 90% of the carbon dioxide from coal plants before it is emitted into the atmosphere and then storing it below the earth’s surface. Recently, Southern Company announced its plans to build the world’s first power plant designed to capture and store most of its carbon; the firm expects to test the facility sometime in 2014 [see The ETF Performance Visualizer].

The Bottom Line

As is the case with any energy investment, it is key to keep in mind the latest industry trends as well as a number of environmental and political concerns. In the case of the Market Vectors Coal ETF (KOL), the future of the ETF is heavily dependent on its underlying industry – one that is likely to face even more headwinds in the future.

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Disclosure: No positions at time of writing.