ETFs At Center Of Nuclear Renaissance

March 03, 2010

With oil prices on the rise again and concern about climate change mounting, ETFs are emerging as the "it" security in what could be a new nuclear age.

The nuclear energy industry is looking more prospective to investors than it has in decades, and ETFs loom as the right security at the right time to profit from initiatives around the world aimed at meeting growing power-generation demand.

The White House recently allocated more than $8 billion in loan guarantees for funding construction of two new nuclear reactors in
. It’s the first project of its kind in the U.S. in about 30 years, and would add to investments in other countries such as France, China, Australia, Japan and

“There is heightened interest in nuclear energy these days,” said Richard Phillips, senior index analyst at New York-based S-Network. “There are more than 200 new nuclear reactors under order, and many more are expected to come.”

Nuclear energy has long been the domain of risk-tolerant investors who brave issues such as waste disposal and a tight industry focus. But with oil prices over $80 per barrel in the midst of an economic crisis and concern about climate change growing, the nuclear industry is getting a second look.

Phillips said ETFs are the least expensive and most efficient way for investors to access the nuclear energy play because they mostly hone in tightly on the industry and avoid individual stock risk.

Three equity ETFs compete in the nuclear space, and all are global in breadth. From the biggest to the smallest and the oldest to the newest, they are: Van Eck’s Market Vectors Nuclear Energy ETF (NYSEArca: NLR), the PowerShares Global Nuclear Energy Portfolio (NYSEArca: PKN) and iShares S&P Global Nuclear Energy Index Fund (NasdaqGM: NUCL).

PKN was the top performer last year, with returns of 44 percent, compared with NLR’s 35 percent and 41 percent for NUCL.


PKN vs. NLR vs. NUCL


About The Funds

The differences in performance have a lot to do with their respective strategies.

NLR invests only in companies that derive at least half of their revenues from the nuclear-energy businesses, and focuses on relatively small companies, while PKN casts a much wider investing net and, like NUCL, favors larger companies. PKN has 63 holdings, while NUCL and NLR have 25 and 24, respectively.

PKN includes companies that do everything from mining uranium to those servicing power plants. It even holds health care companies. For example, 3 percent of the ETF’s holdings are in Thermo Fisher Scientific, a medical-instrument maker whose involvement in the nuclear energy industry amounts to providing power plants with reactor instrumentation systems.

About 70 percent of NUCL’s holdings are large- and giant-caps, with a heavy concentration on utilities. It’s also the cheapest of the three nuclear ETFs, with an expense ratio of 0.48 percent, compared with NLR’s 0.61 percent and PKN’s 0.75 percent.

“Nuclear energy ETFs have a potential to become a staple in an investor’s alternative-energy complex,” New York-based Van Eck’s marketing director Ed Lopez said. “As a concentrated sector play, a nuclear energy ETF might not be for everyone, but it could be used in portfolios that have room for taking on opportunistic risks.”

The sizes of the three funds tell a familiar tale in the ETF industry: The older the fund, the more the assets. Van Eck’s NLR has gathered $180 million in assets since its June 2007 launch, while PKN has attracted $36 million since its April 2008 rollout. NUCL, started in June 2008, has $15 million.

Understanding Goals

While it makes sense for risk-tolerant investors to use ETFs to take advantage of a growth phase in the nuclear industry, they need to know what they own and what they hope to achieve, says Roger Nusbaum, chief investment officer of Phoenix-based Your Source Financial.

“I would wonder if anyone thinking they want to own nuclear energy in their portfolio thinks that that means owning a bunch of utilities that distribute electricity, some portion of which is nuclear,” Nusbaum said.

He noted that half of NUCL is utility companies, while NLR is 26 percent and PKN is 23 percent. “NUCL could be viewed as a utilities proxy with a nuclear twist, but that doesn't necessarily make it a proxy for nuclear,” added Nusbaum.

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