Going Nuclear With Exchange-Traded Funds
Last year a solar ETF roared back from near-death to top the performance charts of exchange-traded funds with a 130 percent gain. Could beaten-up funds that track uranium be the next energy high-fliers?
Uranium's price has fallen more than 50 percent since the March 2011 disaster at the Fukushima Dai-Ichi plant in Japan, which was followed by a May 2011 renewal of Germany's plan to phase out its nuclear reactors by 2022. Japan's idling of its 50 nuclear reactors resulted in a uranium glut and led some producers to cancel projects or close mines.
Now, according to estimates compiled by Bloomberg, analysts expect one in every five of Japan's reactors to restart this year. Adding to that increased demand will be China's plan to quadruple its nuclear capacity by 2020. Slowing growth in the supply of the atomic fuel and greater demand could lead to price gains later this year, according to Jonathan Hinze, a senior vice president at Roswell, Georgia-based Ux Consulting Co., and make 2014, as Rob Chang, an analyst at Cantor Fitzgerald LP in Toronto, wrote in a Jan. 3 note, a "kick off year" for the fuel, one in which it is set for a "violent move higher."
And, believe it or not, there are multiple ETFs to play this risky theme, if your politics don't preclude it.
Global X Uranium (URA), which tracks uranium-mining companies, is the most popular of the uranium ETFs. The fund, with $164 million in assets, is down 1 percent this year and down 76 percent since the Fukushima disaster. It tracks 23 uranium mining companies and has 60 percent in Canadian stocks, 20 percent in Australia and 11 percent in the U.S. The portfolio is highly concentrated; 23 percent is in Cameco Corp. (CCO: CN), for example. Some 70 percent of its holdings are small-cap companies, which helps explain why it's three times as volatile as the S&P 500.
The expense ratio for the Global X Uranium ETF is .69 percent, which is high compared to the average for all ETFs but in line with the .50 percent to .80 percent expense ratios for many niche ETFs. It has an average bid-ask spread of .40 percent, which means that there is a .40 percent gap between prices at which you can sell or buy the ETF, which adds to its total cost. By contrast, a much larger ETF like the Market Vectors Gold Miners ETF (GDX), which trades 33 million shares a day, has a bid-ask spread of just .04 percent.
A more diversified uranium play is the Market Vectors Uranium+Nuclear Energy ETF (NLR). It tracks a broader universe of nuclear energy companies. That wider universe means it has more exposure to large utility companies (33 percent) than URA. Big utility companies have more consistent profits than mining companies. NLR has $77 million in assets and is thinly traded, at 7,000 shares a day, far below URA's 157,000 shares a day. It's down .10 percent so far this year.
The ETF has its biggest chunk of assets in Japan, at 25 percent, followed by 21 percent in France and 18 percent in Canada. It has more money in large-cap stocks than does URA, at some two-thirds of the fund, with the remainder in small-cap stocks. It's much less volatile than URA, and only a bit bouncier than the S&P 500. NLR's expense ratio is .60 percent and it has a bid-ask spread of .57 percent.
URA is the most direct play on uranium; NLR's diversity offers some protection on the downside, though the tradeoff is a drag on the way up. They're both risky -- a lot of variables feed into the outlook for nuclear energy, both practical and political, including the possibility that public opposition to nuclear power in Japan could stymie plans to restart reactors there. That makes the timing of any price moves in the ETFs highly uncertain. So while these ETFs could surge later this year, any investor venturing into them should be looking at the long term.
Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here, and weekly ETF podcasts can be found here.