Know What You're Getting in Coal ETFs
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Don't Assume That KOL is a Good Way to Get Exposure to the Sector
Investors interested in the beaten down coal stocks and those who like ETF's, are probably aware of The Market Vectors Coal ETF, (NYSEMKT:KOL). Foolish investors can guess what this ETF tracks, but how representative of the coal sector is it? Some may be surprised. If one wants exposure to the U.S. coal market, KOL doesn't make a lot of sense. A lot can be gleaned from the top 10 holdings, which account for 62.5% of the portfolio. Five of the top 10 holdings are Chinese (3) and Indonesian (2) coal names. So, right off the bat one can see KOL is not for everyone.
If an investor wants global coal exposure, a perfectly legit idea, 50% of the top 10 holdings from China and Indonesia is really not a good idea. Both China and Indonesia have very substantial involvement in their respective coal industries. If one wants significant upside potential, KOL could lag if the Chinese or Indonesian coal sector is being manipulated by government forces. For example, there is widespread talk of the Indonesian government implementing a "domestic market obligation" whereby producers would be required to set aside a significant amount of production for domestic use. If enacted, this would effectively cap the profitability of the industry.
Global diversification is somewhat limited, a truly diversified portfolio would have greater weightings from Australian, Colombian and Canadian coal companies. Of course, I realize that the holdings are picked based on their market caps, but that doesn't necessarily serve investors well.
KOL Doesn't Necessarily Give Investors Prudent Exposure to U.S. Coal Names.
Among the top 10, KOL holds just three U.S. coal producers, Consol Energy, (NYSE: CNX), Peabody Energy, (NYSE: BTU) and Walter Energy, (NYSE: WLT). While all three are good companies, Consol is not a pure-play coal company, it has a large natural gas business as well. This makes me wonder why Canadian domiciled Teck Resources, (NYSE: TCK) is not included in the ETF. Teck is the 2nd largest premium hard coking coal producer in the world; like Consol it has other business segments, but it's a powerhouse in coal.
In my opinion then, KOL does not track U.S. coal producers all that well and is not sufficiently diversified to be a good global index. However, it's one of the only Coal ETF's available, so investors do use it for hedging and to make directional bets. I recommend that investors pick individual companies that they are familiar with based on their own risk tolerances. For high beta coal stock fun, I like Alpha Natural Resources and Walter. A safer name is Peabody, but I believe it has less upside.
MockingJay2011 owns shares of Walter Industries and CONSOL Energy. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
