Red Hot Coal ETF Returns Not A Trump Trade

April 12, 2017

For all the jawboning President Trump has done about coal miners, you might think it was a huge employer and powerhouse for the future. In fact, the U.S. coal industry has been in decline for decades. That is primarily due to slack demand as power plants rely more on natural gas, and steel is increasingly imported.

U.S. coal production hit its lowest level in 40 years in 2016, and the size of the coal mining work force has been cut nearly in half, to stand at just 77,000 workers (roughly the employee size of Delta Airlines or Whole Foods), spread out over a few dozen companies.

So why, then, has equity-based KOL returned 91.63% over the past year, versus 17.33% for the S&P 500, and 13.16% for the MSCI EAFE Index?

In short, because KOL isn’t really related to what’s going on with U.S. coal miners.

The Bad Times

It wasn’t always looking this good, but it depends a lot on how you think about it. The reality is that the price of coal hasn’t particularly collapsed—at least the kind of coal that goes into power plants:

This chart looks at the price of thermal coal in the U.S. (in orange), and the performance of KOL. You can see that in fact coal prices had a bit of a rally a few years ago, before easing off a bit, whereas KOL had just an awful few years until the beginning of 2016. In fact, in the four years ending 12/31/15, KOL was down a staggering 78%.

The reason for the debacle wasn’t so much the immediate price of coal, it was the decline in demand—prices stayed relatively stable because the industry produced less and less of it. This drove many U.S. coal companies into bankruptcy. It’s been ugly.


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