Is this a good time to buy the new ETF, KOL?
KOL, the new ETF on the market following the coal sector seems like a good prospect. I've been following the steel and coal sector for a while and feel that it is one of the strongest sectors, relatively speaking. I've been waiting for the coal ETF to be released and now it's here. Aside from the problems in the general market that indicate that now is probably not a good time for bullish positions, do you think buying KOL in it's infancy is a good idea, or should I watch it for a while and see how it performs?
Best Answer
357 points
SharonMR answered one year ago …
It's true that the energy sector is one of the hot spots. However, any new guy on the block starts out strong, everyone jumps in hoping to make a killing. Unfortunately, the price goes down before it goes back up. Suggest that you wait until it shakes out a little more and then buy on a confirmed reverse up.
Definately keep it on your watch list. Put it on mine a couple of days ago.
Answers
2775 points
Oldman answered one year ago …
Steph, this is a great question, and the caveats you made are similar to ones posted in the last two days on the Seeking Alpha ETF web site.
There are three issues for coal. cost of transport; cost to clean and cost to control CO2. Some coal producers ship to Utilities locally (i.e., in the U.S.) and they're under scrutiny to clean up the coal ... and not just milk the Federal Gov't. for subsidies to provide cleaner fuel (it's a well known scam , costing taxpayers millions, and dating back to the Clinton era).
With regard to tranport, most is carried by rail and shipping costs have risen, because the coal is in e.g., Wyoming and needs to be transported toa utility in, e.g., Virginia, and the rails use diesel. Similarly, Canadian coal has to go through WestShore Terminal and be shipped to China under contract. The only coal being mined and shipped at a profit is metallurgical coal (used for coking in the steel process) and that's a wee fraction of total N. American coal.
Finally, there's a lot of pressure on utilities and factories to reduce the carbon dioxide load. I know thoae who back the Kyoto protocols don't like to hear this, but the U.S. Canada and developed European Nations emit far less pollution per ton of coal burnt (for any reason) than do the Emerging Market nations.
So Coal, as a commodity - is essential, its costs to produce will go up gradually; its costs to transport will go up with the BalticDryIndex rates and the increased rail tariffs, but its costs to clean up will be rising astronomically.
Therefore, in relation to KOL or any other "Coal" ETF, one has to look beyond holdings of major producers (e.g., Peabody, Arch...) and see if the ETF has any holdings in those companies that clean up after the fact (of burning). That might make this ETF a worthy investment.
1130 points
sundarkambam answered one year ago …
KOL is a volatile ETF. See the link below which discusses it.
Link : http://www.thestreet.com/s/stoke-your-portfolio-with-a-coal-etf/funds/etf/10399209.html
Amid a fair bit of hype, Van Eck issued the long-awaited Market Vectors Coal ETF (KOL) this week.
The fund provides exposure to a segment of the market with compelling long-term supply and demand fundamentals. But it is also potentially volatile. Keep that in mind as I dissect it below.
Van Eck has developed an interesting stable of products that are narrowly focused on sectors that do not seem to be covered by other ETF providers. Its willingness to take risk has produced some very successful funds.
Since KOL listed, I have read and heard several interesting facts about coal that help support the long-term fundamental case. Coal is cheaper than oil and, according to the World Coal Institute, it supplies 40% of the world's electricity. China, by some counts, is breaking ground on a new coal plant every week.
There is not enough oil to fuel China's burgeoning demand for energy. Coal is more abundant and so by necessity China will use more of it to keep up with energy demand.
The drawback of course is that coal is dirty, toxic stuff. As consumption rises, you can expect some fallout in terms of possible litigation or negative sentiment that hurts the stocks of companies in this industry. Kind of like cigarettes, though, I think the global demand will win out over negatives over the long term.
The composition of the fund, similar to most of the Market Vectors products, strikes me as very aggressive; it provide access to where it's really happening in coal, so to speak. While the fund's biggest weighting is in the U.S., at 39%, it also has a 24% weighting in China and 11% in Indonesia. That could add to volatility if the road for those two countries gets bumpier.
Specifically, China Coal Energy is the largest holding at 8.13%, the third-largest is Indonesian miner Bumi Resources, at 7.96%, and the fifth is China's Shenhua Energy, at 7.83%. I mention these to underscore that the fund will very likely feel any market dislocations emanating from Asia.
The fact that the fund is vulnerable to Asia is neither good nor bad, but you need to take it into account. When you construct a portfolio with many different products like this you can end up with more China exposure than you originally intended. You end up with lopsided bets. Again, this is not about the funds but how they are used.
KOL's expense ratio will be 0.65%, it should yield 0.75% and its modified market-cap weighting favors large-cap stocks. The subsector breakdown puts 73% of assets in mining and production, 15% in coal power generation, 9% in mining equipment and 2.3% in technology.
The above chart of KOL's back-tested results underscores how volatile it could be. In fact Van Eck reports the beta as being 1.71, compared with 1.00 for the S&P 500. The back test has performed well relative to the energy sector, but notice that from April 2006 to September 2006, the fund's benchmark index had a vicious correction that was far worse than the Amex Energy Index. The next time energy stocks catch a cold we may see KOL again get the flu, fundamentals notwithstanding.
I am favorably disposed to the concept, but the idea of the fund getting the flu rings very true to me. Anyone holding KOL for part of their energy exposure should consider offsetting some of the volatility with a more staid holding.
508 points
John answered one year ago …
I would sit tight. The coal industry has been doing well with China and India emerging as industrialized nations. The use of coal has been increasing steadily. Yet as well see a global slowdown, production will slow causing the use of coal to slow. This is also a a time when the world is trying to become greener using other sources of energy besides coal (the dirtiest of all fuels).
The ETF is falling straight down and I would not want to catch that falling knife. You can find better ETFs out their with more stability and a longer track record. These funds have to be managed. If the ETF went straight down since in debut maybe it is not managed that well.
Sit tight and give this ETF some time to develop.
