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A Lump of Coal Could Be Nice for Your Portfolio

NEW YORK ( TheStreet) -- Investing in coal has yielded lousy results for the last two and a half years. Since peaking in April 2011 the Market Vectors Coal ETF (KOL) is down 59% while the energy sector as measured by the Energy Select Sector SPDR (XLE) is up 7.5%. Things have been so rough that PowerShares closed its Global Coal Portfolio fund in February, which had only $10 million in assets.

As difficult as it has been for the coal industry it stands to become even more difficult because of new legislation on emissions for new coal-fired plants.
[Read: <a target="blank" data-add-tracking="true" href=""><em>Global Macro: A Correction Looms</em></a>]

New plants will now have to meet the standard of only 1,100 pounds of carbon per megawatt hour produced, compared to about 1,600 pounds for existing plants. In the next year the market should expect new regulations for existing power plants.

Energy production, just like any industry, will have its share of regulation and technological innovation. There is a technological solution to the new regulations. It's called carbon capture. In layman's terms, this process filters carbon out of power-plant emissions and diverts it it underground storage facilities. Then the carbon can be sold for other uses. Unfortunately, carbon capture isn't necessarily economically viable yet, so the innovation hasn't quite caught up to the new regulations.

Despite the concerns about pollution that are the catalyst for these changes, the U.S. still relies heavily on coal, the coal industry employs 550,000 Americans and regulation that is too aggressive potentially threatens some of those jobs.

This would appear to be a terrible time to invest in coal, but coal stocks clearly have slumped from their April 2011 peak, and the way coal is processed and consumed eventually may change.
[Read: <a target="blank" data-add-tracking="true" href=""><em>What Goes Into That Apple You're Eating</em></a>]

For an investor with a high tolerance for volatility, the Market Vectors Coal ETF offers access to a contrarian trade without taking on the risk of investing in individual stocks.

KOL is a global fund with 45% of its holdings in U.S. companies; 16% in China, the world's largest consumer of coal; 10% in Indonesia; and 7% in Australia which exports much of its production to China.
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