Uranium ETF for the Nuclear Trade

Over the years I've written articles about two different nuclear energy ETFs. First the Market Vectors Nuclear Energy Portfolio ( NLR) in 2007 and then the PowerShares Global Nuclear Portfolio ( PKN).

Both funds cover plant builders, utilities and uranium mining stocks. In both articles I laid out a fairly straightforward, long-term thesis that many countries are going to increase their use of nuclear energy which will require several hundred more plants and more uranium. I cautioned that there would be a lot of volatility and that investors would either need patience or need to employ a tactical strategy for trading.

One of the drawbacks of the indexes underlying both funds was the extent to which they had exposure to Japanese industrial stocks -- the companies that design and build many plants. This is a big negative for using these funds as I have little to no faith in Japan as an investment destination.

I think a better way to go is through uranium and now there is a pure play fund with the Global X Uranium ETF ( URA). Regardless of where nuclear plants are built and who builds them, they will all need uranium and the increased demand that comes from new plants creates upward pressure on the price helping all the mining companies like the ones in the new ETF.

Because Global X Uranium is very much a niche fund, it is very concentrated. The largest holding is Cameco ( CCJ) at 20% of the fund. It is difficult to imagine the fund taking off without Cameco which has struggled in the last couple of years due to flooding problems at its Cigar Lake mine but has done much better in recent weeks.

Other large holdings include Paladin Energy ( PALAY) and Uranium One ( SXRZF), each weighing in at close to 12% of the fund. There are 23 holdings in all.

At the country level the fact sheet shows only four countries: Canada, 50%; Australia, 31%; the U.S., 13%; and the UK 4.75%, but that may not be quite right. For example the entire weight for the UK is Kalahari Minerals PLC ( KMPLF) which is listed in London but mines various resources out of Namibia. I would note that far from being a negative, I think the Namibian exposure serves to make the fund more interesting.

This fund will be very volatile. In its first few days of trading, in addition to have big volume numbers immediately, it has been far more volatile than the much broader Materials Select Sector SPDR ( XLB).

URA had been up as much as 15% in its first a day and a half of trading. Shorter term the fund should do very well when the "risk-on" trade is working and getting hit very hard when "risk-off" takes the lead.

Longer-term ownership requires buying into the idea that there will be more nuclear plants over the course of the new decade which will increase the demand for uranium meaningfully which again makes for higher prices.

I can't stress enough the expectation that in a risk-off environment, or during a bear market this fund should get hit very hard. Using Cameco as a proxy, that stock was down 71% from its peak in 2007 to its trough in late 2008 compared to the S&P 500 which was down 56% at its low. The fund stands to be a great hold but understanding the volatility will be essential to having success with the fund.

At the time of publication, Nusbaum was not long any equities mentioned.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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