Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some coal companies to your portfolio, the Market Vectors Coal ETF (KOL) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The coal ETF's expense ratio -- its annual fee -- is 0.59 %. It yields about 1.9% as well. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has underperformed the world market over the past three years and it too young to have a five-year record. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why coal?
As the world's economies recover from their current slump, construction, manufacturing and infrastructure work will pick up, requiring steel, which is made with metallurgical coal. Coal is also still used as an energy source, as well, though low natural-gas prices (as well as low prices for coal) have helped send many coal companies' stocks reeling. But low prices can mean great opportunity, if you think they're temporary.
Gobs of coal-related companies didn't perform too well over the past year, but many could see their fortunes change in the coming years. For example, Alpha Natural Resources (NYSE: ANR) has plunged some 71% over the past year, while Walter Energy (WLTGQ), Arch Coal (NYSE: ACI), and Peabody Energy (BTU) shed 60%, 59%, and 35%, respectively.
There are reasons to be hopeful, though. Most of these companies have been posting better-than-expected results recently, and the price of natural gas has been rising, making coal more attractive than it had been. Another factor propping up coal-company prices is China, which has announced that it plans to spend hundreds of billions on infrastructure work, which will require a lot of metallurgical coal for making steel.
On the downside, there are legal concerns over coal companies, with Alpha Natural Resources recently accused of violating EPA regulations, for example. Arch Coal and others have been engaging in mountaintop coal removal, generating controversy and legal bills, with various decisions pending. Much beleaguered Patriot Coal (NASDAQOTH: PCXCQ) recently announced that it will stop that practice. Debt and the global economy is another worry. Walter Energy, for example, is burdened by a lot of debt, and its expansion into Europe isn't paying off well yet. Some coal companies, such as Arch Coal, have been fodder for takeover speculation.
Peabody Energy has been performing better than many of its peers, remaining profitable, with rising revenue and earnings. Dubbed "the victorious King of Coal," it's the largest U.S. coal producer. Peabody took on a lot of debt to expand in Australia, but that positions it well to supply growing Asian demand -- though coal prices remain low. Some think that coal's glory days are over, but if you're bullish on it, consider Peabody.
The big picture
Demand for coal isn't likely to disappear anytime soon -- but it actually may well decline in coming years. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
