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Are Coal ETFs Back on Track?

Eric Dutram

The first three-quarters of the year were a time period to forget for the coal industry as worries began to cascade over the sector. The space was greatly impacted by weakened demand prospects from China, while global growth concerns in the rest of the world didn’t help matters much either.

Furthermore, the low price of natural gas for much of the time period in question made coal unappealing to a number of power plants, as natural gas is often considered a cleaner source of power. Couple this was the gloomy economic situation and investors had a recipe for disaster in the coal industry for much of the year.

This doom was best demonstrated by the total collapse of Patriot Coal in mid-July of this year. The firm was a $24 stock in 2011, but declared bankruptcy midway through 2012, pulling down a number of weak coal stocks in the process (read Three Low Beta Sector ETFs).

This was no better from an ETF look either, as the two coal ETFs, the Market Vectors Coal ETF (KOL) and the PowerShares Global Coal Portfolio (PKOL) were both decimated by these events. In fact, both funds are down double digits this year with both losing at least 18% so far in 2012.

Yet while the sector has had terrible long term performance, there is some hope that the space is finally bottoming out now that many of the weaker players have fallen by the wayside. Both KOL and PKOL are up more than 4% so far in the fourth quarter, beating out most other products in the process and suggesting that coal may be back on track from an investment perspective (read Is Now The Time to Buy the Coal ETFs?).

What’s Changed?

First, there has definitely been some bottom fishing in the coal sector to start the fourth quarter. After all, coal, despite the issues in the area, is a very necessary component of global power systems and it is unlikely to be going anywhere in the near future. While alternatives are likely to make up a bigger piece of the energy pie, the fact remains that much of the world runs on coal.

Beyond that, some mine idling in a number of areas around the country could reduce supply in the near term, helping to keep prices relatively high. Coal prices have seemingly hit a bottom on a per short ton basis, as they have had significant difficulty breaking below $50/st in thermal coal CAPP terms over the course of the year.

Lastly, from a political perspective, there is now some hope that Romney could win the White House, potentially giving the industry someone who is more pro-coal in the top position in the country. Given this new found optimism over the Romney campaign, some investors are willing to get back into coal stocks in hopes that his potential administration might be friendlier to the industry at large (see Does Your Portfolio Need a Coal ETF?).

All of these factors have combined to make coal’s outlook a little brighter heading into 2012’s homestretch. Thanks to this, investors may want to consider taking a closer look at the two aforementioned coal ETFs at this time, each of which we have briefly highlighted below:

PowerShares Global Coal Portfolio (PKOL) - This ETF charges investors 75 basis points a year in fees and holds 27 stocks in its portfolio. Volume is a tad low suggesting modest bid ask spreads, although the yield is reasonable at 2.1% in 30 Day SEC terms (see The Truth about Low Volume ETFs).

In terms of country exposure, the U.S. accounts for 31% of assets, while China and Indonesia round out the top three with exposures of, respectively, 24.5% and 17.9%. For market cap levels, large caps make up the most by a slim margin, although roughly 40% is also included in mid caps, giving the fund a nice tilt towards smaller securities.

Market Vectors Coal ETF (KOL) - This ETF also focuses in on the global coal industry holding 35 securities in its basket and charging investors 59 basis points a year in fees for its services. This product sees more volume than its PowerShares counterpart, thanks in large part to its solid AUM of $222 million (read the Three Biggest Mistakes of ETF Investing).

The U.S. again accounts for the top spot, but does so with roughly 38% of assets, followed by an 18% holding for Canada, and then 10% weights for both Indonesia and Australia. From a cap perspective, large caps take up roughly 50% of assets while mid caps make up another 43% of the fund.

It is also worth pointing out that KOL currently has a Zacks ETF Rank of 3 or ‘Hold’, suggesting that the fund will be a decent choice in the medium time frame.

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