Uranium ETF Meltdown: Can Nuclear Power Bounce Back? (URA, NUCL, NLR, PKN, CCJ)
Eric Dutram: While the past few months haven’t exactly been kind to broad commodity miners, they have been especially troubling for the uranium sector in particular. The segment has found itself under near continuous pressure so far in 2012 and appears unable to break higher for any significant period of time.
This continues a long and downward trend for the Global X Uranium Mining ETF (NYSEARCA:URA), since the fund’s inception in late 2010. Over that time period, the ETF has lost close to 57% of its value including a nearly 13% slump in 2012 alone (read Could This Be The Year For These Mining ETFs?). [Related: Cameco Corp (NYSE:CCJ)]
Obviously the Fukushima disaster in March of 2011 and the result of this tragedy played a huge role in this product’s slump last calendar year as many had predicted the demise of nuclear power on a wide scale. While this dire prediction has not come true, issues still remain in the nuclear space in Japan and a slowdown in emerging markets has prevented new growth in that segment of the market as well (see Japan ETFs: One Year After Fukushima).
Add in broad commodity weakness and the leveraged nature that commodity miners often have on the underlying product, and many have voted with their dollars to stay away from the radioactive space. This is especially interesting considering the price of uranium so far in 2012; the product has been more or less flat on the year and has only lost about 8.5% in the past 52 week period.
Clearly, uranium is still a very necessary commodity for many producers of power and the price seems to have found a floor at the $50/lb. mark in recent times. Instead, uranium miners seem to be driven by fear of future regulation and a slow growth market in the space, causing many to sell-off miners of this important product.
After all, uranium miners tend to be smaller producers and thus more susceptible to ebbs and flows in the market than their more diversified metal producing peers.
In fact, large caps make up just 26% of the portfolio in URA while small and micro caps combine to account for more than 60% of the total assets. Meanwhile, from a country look, American securities make up just 18% of the total assets, leaving the bulk to Canada (40%), Australia (31%), and Russia (11%).
While this might be great from a diversification perspective, it has been a disaster from a currency perspective. The Canadian and Australian dollars as well as the Russian ruble, have been under pressure as of late adding insult to injury in the URA product.
Since dollar denominated assets account for just under one-fifth of the total, this strength in the U.S. dollar as of late has only compounded the general risk off trade pushing investors into high losses for this nuclear-focused ETF (see Three ETFs For A Nuclear Power Renaissance).
Is Anyone Safe?
The only silver lining in the sector is that a broader look at the space does produce a slightly better result. This is evidenced by looking at a few of the funds in the nuclear power segment which generally have greater levels, or have a heavy focus, in the nuclear power utilities space.
Companies in this corner of the stock market tend to be relatively safe plays and, if anything, have benefited from the declining level of growth confidence in the sector. This is because these firms use uranium as an input so while they are dependent on the product they can often benefit from a lower or stable price for the commodity.
Furthermore, due to the safe haven nature of utilities, these securities have seen heavy inflows during the market turmoil of the past few months, helping ETFs that have heavy exposure to the space lose less than many of their more cyclical counterparts.
In this segment, investors have three choices available; the Market Vectors Nuclear Energy ETF (NYSEARCA:NLR), the PowerShares Global Nuclear Energy Portfolio (NYSEARCA:PKN), and the iShares Global Nuclear Index Fund (NYSEARCA:NUCL).
While all have their differences in terms of holdings and concentration levels, they do have some similarities which have allowed all three of these funds to outperform URA over the recent past. Arguably the most important of which are the holdings and currency exposure differences (Is It Time To Buy The Hedged Currency ETFs?).
In this respect, all three have at least a quarter of their portfolio in ultra safe utilities which have helped to buoy these securities during this difficult time. Meanwhile, commodity currency exposure is almost non-existent in these funds, helping the products lose less from this aspect as well.
Overall, the nuclear space has been beaten down significantly over the course of 2012 and over longer time periods as well. However, for those looking to make a play on the space, any of the broader nuclear power ETFs look to be a better choice at this time.
These ETFs have more U.S. exposure and have a greater focus on safer securities such as utilities. They can thus be less volatile than the small cap holdings of URA while still offering quality exposure to the nuclear markets for those investors who believe that the space can come back (read Top Commodity ETFs In This Uncertain Market).
After all, uranium prices have had trouble falling below the $50/lb. mark and power consumption levels are rising in much of the developing world. Nuclear power appears as though it is here to stay and but it could still see more volatility in the short term, suggesting that a broad play on the space, compete with nuclear focused utilities, is probably still the best way to attack the segment at this time.
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