Coal ETF Hits Rough Patch

NEW YORK (TheStreet) -- The coal sector is coming under the spotlight with the reporting of key earnings this week.

Investors seeking exposure to the sector may seek coverage through the Market Vectors Coal ETF(KOL).

However, after Massey(MEE) reported dismal earnings at the market close Tuesday, investors may question coal as a stable choice.

The company reported a net second-quarter loss of $88.7 million and a loss of $55.1 million for the first half. The net loss for the quarter included associated costs in connection with a deadly mining accident in April.

The company's operations further slowed in the second quarter after a sluggish first quarter. Likewise, KOL saw a similar slowdown in the second quarter, as 2010 has been much more sluggish than 2009 when the fund was a leader in the market rally.

While the S&P 500 is essentially flat for the year, KOL is down by roughly 5% year to date. By contrast, the S&P 500 gained 20% and KOL more than doubled, up about 120%, for the same time period in 2009.

In the second quarter, KOL stock fell by 23%, whereas the S&P 500 lost 12%. By contrast, the fund and the S&P 500 both grew by about 5% in the first quarter.

The fund's sluggishness can be attributed to concerns of a slowdown or stall in the global economic recovery. Sentiment in the industry is increasingly dependent on the economic outlook of China and other developing economies. In particular, the world is increasingly looking to East Asian demand as a source of support for coal prices.

Earlier this year, China's efforts to damper a potentially overheating economy took the wind out of KOL's sails. Although China's economy is expected to perform well, second-quarter growth for the Chinese economy is already slower than that of the first quarter.

While only 21.9% of KOL's total holdings are in Chinese companies, other companies in the sector will also be affected by the impact the Chinese economy has on coal markets.