Why a Coal ETF May be a Fit for Your Portfolio

Coal in opencast coalmine
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Alternative energy sources are a hot topic nowadays due to the high prices of oil and gas. It’s no different in the world of ETFs where investors are looking for alternative investment sources as well. Enter coal ETFs—alternative energy, alternative investment.

What’s So Hot About Coal ETFs?

The short answer is the Waxman-Markley Energy Bill that recently passed. This bill rewards the use of clean energy resources…like clean-coal.

That hopefully will keep the demand for coal around for a long time as countries attack energy crises and look for clean energy sources.

The long answer is time. As with any stable commodity, investors want a product that will stand the test of time before including it their investment strategy. Stable investments like gold and coal, are sound ways to maintain some stability in a portfolio.

International Impact of Coal

As more and more countries become “green-conscious,” alternative energy sources will need to be available. Coal will be no exception. Even now the demand for coal is high in countries like China and India, so a coal ETF can be used as an international investment to gain foreign exposure or even hedge some foreign risk.

For example, if an emerging market or country depends on coal as its chief export (as opposed to Albania which you know is chrome…according to the Cheers song anyway), you can use a coal ETF to gain exposure to this region or hedge any foreign risk in this market.

Why Invest in Coal

Besides the usual advantages that come with ETFs like the tax benefits, coal ETFs can be utilized in a portfolio a few different ways.

  • Hedge Risk - As I mentioned above, a coal ETF can be used to hedge downside or upside risk. Be it foreign risk, energy risk, or even coal risk.
  • Diversification – Any new investment can not only help diversify a portfolio but decrease systematic risk as well.
  • Exposure – A coal ETF can be used to gain exposure to energy, alternative energy, and/or the coal sector.

Disadvantages

There are disadvantages with any investment and coal ETFs are no exception. No asset is loss-proof. However, if you know the disadvantages of ETFs, the risks of your market, and conduct thorough research, you should come up with a sound strategy that works best for your portfolio.

For example, in the United States, there is currently a coal surplus due to the fact that people are more energy conscious, the energy crisis, and the recession. So electricity usage is down. Therefore there is a low demand for coal from major power plants and the price of coal has decreased. Whether that creates a buying opportunity or is more of a bearish sign is up to the individual investor.

How to Include Coal in Your Profile

If you are ready to get started with these ETFs, I suggest you watch some major Coal ETFs and see how the react to market conditions. Once you are confident in your analysis, only then is it time to put coal ETFs in your stocking, which is a good thing.

  • KOL – Market Vectors Coal ETF

VanEck Vectors Coal ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS™ Global Coal Index (MVKOLTR), which is intended to track the overall performance of companies involved in coal operation (production, mining, and cokeries), transportation of coal, from production of coal mining equipment as well as from storage and trade.

  • TONS -  Green Haven Coal Fund - Launched February 20th, 2015

The WisdomTree Coal Fund is a passively managed exchange-traded security designed to track the daily price movements of Rotterdam coal futures that are traded on the CME Group, Inc exchanges. The Fund intends to hold an equal number of futures contracts in each of the three months comprising the nearest calendar quarter. Four times a year, the Fund will attempt to roll its positions in the nearby calendar quarter to the next calendar quarter over 5 business days.

And as with any investment, a company stock, an ETF, Index or even coal futures, please make sure you thoroughly research this fund before making any trades (long or short). Conduct your due diligence, watch how ETFs react to different market conditions, take a look under the hood and see what is in the fund.

And if you have any questions or concerns, make sure you consult a broker, a financial advisor, or another financial industry professional.