The Inflation Reduction Act includes a range of tax and production credits for nuclear energy and research funding to about $700 million in support of high-assay, low-enriched uranium fuel and $150 million in funding for the Department of Energy’s Office of Nuclear Energy.
Among the benefits to the nuclear industry in the U.S., the act could provide up to $30 billion in production credits, which could in turn stave off the early retirement of a significant number of nuclear power plants, according to a blog by law firm Bowles Rice.
Because nuclear energy comes with virtually no emissions, many view it as an essential component in fighting climate change. A report released by the World Nuclear Association in September 2021 notes that nuclear energy accounts for just 10% of the world’s electricity production, but that percentage is likely to increase in the future because of its emissions-free nature among other reasons.
However, nuclear power remains controversial in ESG circles. Some worry that an increase in nuclear power plants could result in an increase in nuclear disasters, such as the Fukushima nuclear disaster in 2011 after Japan was hit by both an earthquake and a resulting tsunami.
Certainly, the possibility of a nuclear disaster in the wake of Russia’s shelling of Ukraine’s sole nuclear power plant earlier this summer has added further fuel to the argument against nuclear energy.
To say that it remains an issue of debate is an understatement. But there’s no denying that the Inflation Reduction Act will help shore up the nuclear energy industry in the United States, which means that uranium, crucial to the production of nuclear energy, will likely see its value increase.
Although publicly traded utilities often offer exposure to nuclear power, such business activities are usually only a small percentage of a company’s revenues. Uranium, however, is the key commodity that drives the nuclear energy industry at the global level. By focusing on companies involved in the production of uranium, investors can tap into the performance of the raw material that underlies the entire industry.
Currently, three ETFs track the stocks of uranium-producing companies, though only two have more than $100 million in assets under management. The Global X Uranium ETF (URA) is the larger of the two, with $1.4 billion in assets under management, while the Sprott Uranium Miners ETF (URNM) has $837.7 million.
Looking at the portfolios of the two ETFs, with 31 equity securities in common between them, URNM’s portfolio is essentially a subset of URA’s broader portfolio. The stocks in URNM that are not in URA only represent 1.7% of URNM’s total portfolio.
URA has a somewhat broader portfolio, with 47 companies. And while URNM’s top 10 holdings represent about 76% of its total portfolio, URA’s are a little more than 60% than its portfolio, suggesting it has greater diversification. URA is also a little more diversified, as its holdings are spread across nine countries, versus six for URNM.
The key reason investors should pay attention to these names is that both URA and URNM have generally outstripped the broad global market, as represented by the iShares MSCI ACWI ETF (ACWI) since their launches. URA has a longer track record, having launched in November 2010, while URNM entered the scene in December 2019.
Over the 10-year annualized period, URA trailed ACWI by 15 percentage points, with a decline of 5.56%. However, it was ahead over the five-year annualized period, with a return of 11.46% versus ACWI’s 8% return. Over the three-year annualized period, it was up more than 29%, while ACWI was up 10.13%.
URNM has significantly outperformed both URA and ACWI during the 12-month period though, with a return of 24.16%, while URA returned 14.29% and ACWI fell by almost 12%.
Both URNM and URA are global funds, so it’s important to look beyond their domestic exposures when evaluating them. Global warming and decarbonization are major concerns worldwide, and so is nuclear power, a fairly low-impact source of energy that is evolving beyond the era of nuclear reactor accidents.
URNM includes exposure to Canada, Kazakhstan, Australia, United Kingdom, the United States and Hong Kong. URA includes securities from those countries as well as Korea, Japan and South Africa.
Country allocation is actually important for these funds. Canada has the largest allocation in both, making up roughly half of each fund. But Kazakhstan receives a much lower weighting in URA (6.54%) than it has in URNM (close to 19%), where it is the second-largest country. URA, however, weights Korea at 10.63% and Japan at 7.99%.
Both funds offer exposures to the U.S. of less than 5% of their respective portfolios. Although the Inflation Reduction Act could spur more growth in the nuclear power industry in the U.S., this is definitely a global issue, with many countries looking to expand their reliance on it.
URNM Country Allocations
URA Country Allocations
Korea has 25 nuclear reactors that generate roughly one-third of the country’s electricity, with three more currently under construction, according to the World Nuclear Association. The country’s profile on that site notes that while a prior administration had pledged to phase out nuclear energy, the recently elected president has said that plan will be abandoned, suggesting the country could be a growth area for nuclear power.
For Japan, the data from the World Nuclear Association says that the country needs to import 90% of its energy requirements, which is not surprising for an island nation. Prior to the Fukushima nuclear disaster, the country generated 30% of its electricity through nuclear power.
In the months after the accident, all but two of Japan’s 33 nuclear reactors were idled, with the country saying it would abandon nuclear as a power source by the 2030s, according to a Reuters article from September 2012.
The country has since changed its plans dramatically, with the World Nuclear Association reporting Japan plans to generate half of its electricity through nuclear power by 2030.
Kazakhstan, a country closely allied with Russia, is notable because while it currently has no operating nuclear reactors, it is the largest producer of uranium in the world, accounting for 43% of the global supply in 2019 produced from 13 different mining projects. Ten of those projects are owned jointly with foreign entities.
URA is both cheaper and more liquid than its counterpart, charging 0.69% in expense ratio versus 0.85% for URNM. It averages daily dollars traded of $32.17 million versus $15.13 million for URNM. And URA has a spread of 0.06% while URNM has one of 0.24%. These are small differences, as these are very similar funds.
It’s true that URNM has outperformed its counterpart significantly during the 12-month period, but URA has a lot to recommend it beyond its longer track record. It offers a somewhat broader and more diversified portfolio, encompassing more countries, which could give it an edge at a time when nuclear power seems to be gaining favor, despite the situation around the Ukraine reactor.
Its lower weighting to Kazakhstan could also be an advantage due to that country’s ties with Russia, which could cause other nations to look elsewhere for uranium. And while the U.S. nuclear power industry is about to get a noticeable boost through the recent legislation, since both funds have similar weightings to U.S. stocks, domestic exposure is unlikely to be a deciding factor when choosing between them.
Contact Heather Bell at [email protected]