Exchange traded products tracking commodities ranging from palladium to wheat have been in focus due to geopolitical tensions this year with the ETFS Physical Palladium Shares (NYSEArca: PALL) residing as this year’s top-performing physically-backed precious metals ETF due to Russia’s status as the world’s largest palladium producer.
Another commodities ETF, though of the equity-based variety, could be the next to get a lift from the goings on in Russia: The Market Vectors-Coal ETF (NYSEArca: KOL). Somewhat quietly, KOL gained 2.7% last month and the ETF’s run may not be over. [Death of Coal ETF May be Exaggerated]
The crisis in Ukraine and subsequent economic sanctions by the West against Russia has stoked fears that supplies of natural gas to Europe, a third of which come from Russia, could be vulnerable. That could open the door for more upside of U.S. coal producers as European electricity providers look for alternatives to natural gas.
“Europe’s heightened concerns about energy security could provide an opportunity for U.S. coal companies, which have been hurt by declining domestic consumption, to step in and fill the gap as winter approaches. More than half of U.S. coal exports already reach Europe,” reports Akane Otani for Reuters.
KOL could use the help. The ETF is one of a small amount of non-leveraged sector funds that have traded lower over the past several years, having lagged the S&P 500 in significant fashion since the March 9, 2009 market bottom.
Over the past two years, KOL is down 14.1% while the S&P 500 is higher by 42.2.%. KOL has perked up in recent months,gaining 5.5% over the past 90 days as a surge in shares of steelmakers has lifted coal stocks.
KOL’s leverage to the rebound in steel stocks comes by way of the ETF’s exposure to producers of metallurgical coal, the grade of coal used to produce steel. U.S. metallurgical coal producers found among KOL’s 36 holdings include Consol Energy (NYSE: CNX), Arch Coal (NYSE: ACI), Alpha Natural Resources (NYSE: ANR) and Walter Energy (NYSE: WLT). [Steel Stokes Coal ETF Rebound]
Still, a Russia-driven rally for KOL and its constituents could be short-lived. Analysts and fund managers quoted by Reuters note that the expansion of U.S. natural gas supplies has been a blow to coal stocks and that scenario is unlikely to abate anytime soon. Electric utilities have warmed to natural gas because of the commodity’s low prices and because it burns cleaner than coal.
The drop in coal stocks has been so precipitous in recent years that just three – Alpha Natural, Consol and Peabody Energy (NYSE: BTU) – remain in the S&P 500, according to Reuters. Those stocks combine for 12.6% of KOL’s weight, according to Market Vectors data.
Market Vectors-Coal ETF
ETF Trends editorial team contributed to this post.