A Compelling Nuclear Energy Play

NLR has a smaller average market cap of $9.5 billion vs. $30 billion for PKN. The two funds only share four of their respective top 10 stocks in common. The difference in mining sector weights also affects the country allocation, with PKN at 11% Canada and 4% Australia, while NLR weights them at 18% and 10%, respectively.

One last statistical nugget is that PKN has a slightly higher expense ratio of 0.75% vs. 0.65% for NLR.

Both nuclear funds have the word energy in their names but are heaviest in industrial, mining and utility stocks. This raises the question of what part of a portfolio should either nuclear fund be considered?

It seems pretty clear that PKN will have a high correlation to NLR (this has been the case thus far and given the overlap that should continue). Since its inception NLR has had a 0.748 correlation to iShares Global Materials(MXI Quote), a 0.698 correlation to iShares Global Energy(IXC Quote), a 0.652 correlation to iShares Global Industrials(EXI Quote) and a 0.607 to iShares Global Utilities(JXI Quote). (All correlation numbers from PortfolioScience.com.)

This implies that for anyone building a portfolio from the sector level, which is how I do it, the nuclear funds might be best thought of as part of the materials sector allocation. It will be interesting to see if this stands up for PKN given its smaller allocation to mining stocks, but in the last month PKN correlates most closely to MXI compared to the other sector ETFs.

One last point to make about NLR, and I believe this will be the case with PKN, is that the nuclear energy theme is very volatile. NLR has had a standard deviation of 30.5 vs. 19.64 for the S&P 500. From early November to mid-January, NLR fell by 35% while the S&P 500 fell about 15%. Regardless of your opinion of the fundamentals of nuclear energy, that sort of swift decline could repeat in the future.