Energy stocks have enjoyed extraordinary performance in recent years. Yet oil prices have fallen from their peaks around $100 per barrel, and natural gas is nowhere near its historic highs. As a result, investors wonder if there are other ways to play the energy market.

The Market Vectors Coal ETF (NYSE: KOL), which came to market just last week, is the first ETF to offer a diversified slice of the global coal industry. The fund provides a useful option for investors considering going beyond oil and gas producers.

Fund facts

  • It began: Jan. 10
  • Expense ratio: 0.65%
  • Net assets: $6 million.

The Market Vectors ETF tracks the Stowe Coal Index, which includes 60 companies from around the world. The companies in the index must generate at least 50% of their revenues from coal mining and coal-related activities. The fund's top holdings include two Chinese companies, China Coal Energy and China Shenhua Energy, along with CONSOL Energy (NYSE: CNX) and Peabody Energy (NYSE: BTU). Joy Global (Nasdaq: JOYG) and Arch Coal (NYSE: ACI) are also included.

Is coal the next oil?
With prices at record highs and demand soaring, there's no end in sight to bullish energy forecasts. Coal is widely used as a solid fuel for generating electricity, but it is also considered a dirtier fuel than petroleum and natural gas. Its reputation as a major contributor to climate change is well-deserved, because this black gold is the largest source of carbon dioxide emissions. Yet despite these problems, coal use is growing rapidly, in large part because it is inexpensive and in abundant supply.

Even though the coal ETF invests its assets globally, its narrow focus brings a number of risks. With exposure to a dozen countries, political risks abound, along with typical local and global market fluctuations and movements in energy prices worldwide.

Does the fund fit in your portfolio?
Certainly, the Market Vectors Coal ETF doesn't have the breadth to represent a substantial part of any well-diversified portfolio. But as a concentrated sector play, an investment in coal could bring solid returns; rapidly growing demand indicates coal will be an attractive energy source for many years.

At the same time, any investment in a diversified portfolio of global coal companies means a large exposure to economies that use coal extensively, like China's and India's. China is building around seven coal-fired plants a month on average, so its rapidly growing but volatile economy is likely to continue playing a major role in the industry. If you're comfortable exposing yourself to these risks, then the fund may be appropriate for a part of your portfolio.

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