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Make Your Portfolio Glow

By Zoe Van Schyndel, CFA - Updated Apr 5, 2017 at 7:54PM

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Will nuclear energy ETFs lead the next wave up for energy?

Until 2006, the U.S. had gone 30 years without licensing a new nuclear plant. The approval of the National Enrichment Facility in New Mexico, however, has investors wondering if the approval climate may change in the near future -- opening opportunities for investors close to home.

In the meantime, global interest in this alternative to carbon-based fuels has grown. With 42 nuclear power reactors under construction around the world -- and just over half of those located in the emerging-market economies of Russia, India, or China -- the future for nuclear energy is very much a global endeavor.

Investors who want to bask in the radiance of this energy source have three sector exchange-traded funds to choose from: Market Vectors Nuclear Energy (NYSE:NLR), PowerShares Global Nuclear Energy (NYSE:PKN), and iShares S&P Global Nuclear Energy (NASDAQ:NUCL). Although all three funds have a global focus, there are some significant differences between them. 

Fund specifics
With each of the three funds investing roughly two-thirds of its assets outside North America, the industry is clearly a global play, with the attendant diversification benefits and geopolitical risks. Japan and France are key players in the nuclear energy arena and make up significant parts of the portfolios of all of the funds. Another commonality of the funds is that they all include holdings of Exelon (NYSE:EXC) and Cameco (NYSE:CCJ) in their top holdings, although in different weightings. Overall, the PowerShares fund is the more diversified of the lot, as it owns more than 60 different stocks, versus around 40 for the Market Vectors fund and 25 for the iShares ETF.

Even though emerging markets dominate the current rankings of nuclear power plant construction, the three ETFs are not heavily invested in these countries, favoring bigger companies such as Constellation Energy (NYSE:CEG) and FirstEnergy (NYSE:FE). As these countries expand their nuclear power industries, though, that will probably change.

Fund facts

Fund

3-Month Return

1-Year Return

Expense Ratio

Assets

Market Vectors

(26.54%)

(50.08%)

0.65%

$127 million

PowerShares

(33.38%)

N/A

0.75%

$26 million

iShares

(30.41%)

N/A

0.48%

$6 million

Source: Morningstar.

Fund prospects and risks
Emerging markets might be where the action is these days for nuclear energy, but the recent Mumbai bombings serve as a reminder to investors of the dangers of these markets. Moreover, the credit crunch is making it hard if not impossible to obtain financing for mining operations. That means uranium supply is likely to be constrained for some time, posing a risk for nuclear power plants that rely upon this metal as their fuel source. Eventually, this restriction will change and the price of uranium may reverse its 2008 swan dive as additional supply comes to market.

Longer term, the Kyoto Protocol and the European carbon trading programs provide a financial benefit for avoiding greenhouse gas emissions and increase the appeal of nuclear power. Another positive of this power source is that once nuclear power plants are up and running, they tend to be in place for decades -- providing a steady revenue stream. 

Portfolio fit?
As an alternative energy play, a nuclear energy ETF can balance your fossil-fuel stock holdings to give you diversification. The global focus of the three ETFs will serve investors well if the rest of the world recovers from the recession faster than the U.S. does. Yet many of these international markets are risky, and the concentration risk that these funds bring by being in one energy niche is an additional concern.

For those willing to take a closer look, the Market Vectors fund has the largest amount of assets as well as a longer track record than the other two funds, limited though it is. I am usually biased toward the lowest-cost fund option, but in these uncertain times, it seems unwise to place assets in any fund with minimal assets when there is an alternate choice.

Related Foolishness:

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Fool contributor Zoe Van Schyndel lives in the Seattle area, where she enjoys the coffee and natural wonders. She does not own any of the funds or securities mentioned in this article. The Motley Fool has a disclosure policy.

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Stocks Mentioned

VanEck Vectors ETF Trust - VanEck Vectors Uranium+Nuclear Energy ETF Stock Quote
VanEck Vectors ETF Trust - VanEck Vectors Uranium+Nuclear Energy ETF
NLR
Cameco Corporation Stock Quote
Cameco Corporation
CCJ
Exelon Corporation Stock Quote
Exelon Corporation
EXC
FirstEnergy Corp. Stock Quote
FirstEnergy Corp.
FE
Constellation Energy Group, Inc. Stock Quote
Constellation Energy Group, Inc.
CEG

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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