After nearly doubling to rank as one of 2016’s best-performing non-leveraged exchange traded funds, the VanEck Vectors Coal ETF (NYSEArca: KOL) is up nearly 13% year-to-date. However, KOL and the coal industry itself face mounting challenges from increasingly accessible and cheaper sources of alternative energy.
Cheap natural gas has previously weighed on coal demand as electric utilities have switched to that cleaner-burning fuel over coal. The ongoing shale oil boom has pressured natural gas prices and made natgas a cheap alternative to coal. Additionally, new environmental regulations have forced coal-fired power plants to close, and many are being replaced with natural gas.
KOL was boosted in significant fashion last year on expectations that President Donald Trump would create more coal-related jobs, but investors should approach that thesis with caution.
“Clean energy installations broke new records worldwide in 2016, and wind and solar are seeing twice as much funding as fossil fuels, according to new data released Tuesday by Bloomberg New Energy Finance (BNEF). That’s largely because prices continue to fall. Solar power, for the first time, is becoming the cheapest form of new electricity in the world,” reports Tom Randall for Bloomberg.
Despite concerns that President Donald Trump would present hurdles to the alternative energy industry, related exchange traded funds are performing admirably this year. For example, the First Trust NASDAQ Clean Edge Green Energy Index Fund (NasdaqGS: QCLN) is higher by 10% year-to-date.
Contributing to the rapid growth of renewables, the improvement in technologies has drastically cut costs for solar and onshore wind power. The average global generation costs for new onshore wind farms declined by an estimated 30% between 2010 and 2015 while big solar panel costs plunged by two thirds. The IEA projects costs will further drop over the next five years by 15% on average for wind and by 25% for solar power.
QCLN, which turned 10 years old earlier this year, follows the NASDAQ Clean Edge Green Energy Index. That benchmark “is a modified market capitalization weighted index designed to track the performance of clean energy companies that are publicly traded in the United States and includes companies engaged in manufacturing, development, distribution and installation of emerging clean-energy technologies including, but not limited to, solar photovoltaics, biofuels and advanced batteries,” according to First Trust.
“Wind and solar have taken off—so much so that grid operators in California are facing some of the same challenges of regulating the peaks and valleys of high-density renewables that have plagued Germany’s energy revolution. The U.S. boom, while not the first, has been remarkable,” according to Bloomberg.