Sunday, January 20, 2008

The new KOL ETF: A one stop source for Coal energy exposure

There is now an alternative to oil exchange traded funds, Van Eck's recently launched the Market Vectors Coal ETF (KOL).

KOL tracks the Stowe Coal Index, which covers 60 companies from around the world that are involved in the coal industry. The index was up over 103% in 2007 and has a three-year annualized return of 43.81%. Pretty impressive performance – and the global demand for energy continues to grow. Global use of coal has risen 65% in the past decade, with much of the increase coming from the Asia-Pacific region. Coal supplies a quarter of the world's energy and is the source of 40% of the world's electricity.

On the other side of the coin, using coal for energy is a significant cause of pollution. Burning coal is proven to be a leading cause of smog, acid rain, and air toxins. Investors with an environmental mindset may pan the KOL ETF.

The index includes stocks from 12 countries. The components companies are involved in five areas of the coal industry; mining and production (73.1%), mining equipment (9.0%), transportation (0.7%), technology (2.3%), and power generation (14.9%). The top five components include China Coal Energy, 8.91%; Bumi Resources, 8.62%; China Shenhua Energy Co., 8.22%; CONSOL Energy Inc., 7.52%; and Peabody Energy, 7.31%.

The overall expense ratio is listed as 1.09%, however the expenses are capped contractually to 0.65% until the end of April for KOL. These figures are expensive for an ETF, but cheaper than most energy focused mutual funds. The fact sheet for KOL can be found at Van Eck's website.

The KOL ETF is likely to continue to rise as the demand for energy continues to grow worldwide over the upcoming years. Many countries continue to strive for an alternative to oil – however only coal is the only economical alternative besides nuclear energy available on a mass scale. Alternative energy programs such as solar and wind still face a significant ramp before they can be economically deployed in scale. The prospects for continued appreciation of the Market Vectors Coal ETF appear to be solid – only time will tell if the performance over the upcoming months matches the previous performance of the index in 2007.

Disclosure: The author does not have a position in any of the equities mentioned in this article. The information provided does not constitute a solicitation to buy, or an offer to sell securities.