This relatively new ETF has only been trading since January. With top holdings that include
Massey Energy Company
( MEE), the fund has prospered this year as the rest of the market has foundered.
Soaring energy costs have fueled the success of this fund and one market analyst sees the present supply vs. demand situation as being favorable to coal investors.
"With oil prices rising and demand for coal from China and India rising, the outlook for coal is very promising," says Phil Flynn, vice president and senior market analyst at
. "I think demand for coal is going to continue to remain very strong."
Although Flynn acknowledges the risk that environmental worries present to the industry, he sees a drive toward energy independence as an offsetting force.
"Concerns about global warming and pollution are among the biggest risks to the industry," he said. "Though I still think the outlook for coal is good as the U.S. makes a push to become less reliant upon foreign oil."
Frank Husic, chief investment officer of
, has maintained a similarly positive sentiment toward the coal space for some time now, and continues to like this area of the market.
"It has been one of my favorite areas of the market for three years now," he says. "It's the short-term answer to our energy problem because it is something that we have a lot of. The U.S. is the Saudi Arabia of coal."
Husic agrees with Flynn on the risk that environmental concerns pose to these stocks, and adds volatility as another theme to be mindful of.
"Coal has generally traded at somewhat of a discount because it is environmentally unpleasing," he says. "There has also been blood-curdling volatility in the coal stocks recently because they are a leader group right now."
Husic believes there is the potential for consolidation in the industry and says that investors could use the ETF to hedge their bets.
"One strategy would be to buy names that have looked like potential takeover targets such as
James River Coal
( NCOC) and
International Coal Group
( ICO), and sell the ETF short as a hedge," he says. "Then you would be protected to some extent if the group were to collapse."
Drilling down on some of the coal ETF's top holdings, Ann Kohler, an Energy Analyst and Managing Director for
, is particularly fond of companies with exposure to metallurgic coal, which is used in steel production.
"There has been a very strong level of demand on a global basis for metallurgic coal," she says. "The metallurgic-focused companies have strong fundamentals as well."
When it comes to individual names, Kohler has long been a fan of Massey Energy.
"It has been my top pick in the space for the past year and a half," she observes. "There is probably a little bit more stability on the metallurgic side of their business."
Shares of Massey have more than doubled, rising 157.1% year to date. In April, the company announced a 30% year-over-year improvement in its first-quarter earnings per share. Kohler maintains a buy rating on Massey.
Among the ETF's other holdings, Kohler has a hold rating on Peabody and an underperform rating on Arch Coal.
"I'm concerned that there could be a pullback in the price of oil, which could negatively impact Arch's steam coal business," she says.