The great advantage of the exchange-traded fund (ETF) is that it’s built-in diversification. The great disadvantage? Also that it’s built-in diversification.
Efficiency in diversification can also mean getting results that are average. The solution is to find an ETF in a particular sector that is diversified in two ways: by location and by industry. Location is the key to effective diversification. If you believe it is a wise move to invest globally, which company should you pick? Or, is the ETF an effective answer?
The Van Eck Vectors Coal ETF (KOL) is diversified by industry:
The ETF is also diversified by country:
The fact that more than one-fourth of investments are in China reveals the importance of this country in the energy sector. China is “number one” in the world in coal production and use. It produces approximately
four billion tons per year (compared with the United States at about one billion). Five countries produce three-fourths of the world’s coal, led by China.
With the KOL fund investing one-fourth of its assets in China, it is nicely diversified among other countries as well. It has been on a roll (see “Who says coal is dead?”).
The rising trendline demonstrates how price has rebounded in 2016. KOL rose 241% in one year, after dropping approximately 90% from 2011 through 2015.
Price consolidated between November and December, when the entire market was in a “wait and see” mode following the election. With a new administration now in charge, the entire energy market is likely to boom. The Keystone and Dakota pipelines are being fast-tracked, and the U.S. coal industry will see significant reductions in the regulations imposed during the last eight years.
That regulatory trend was defined early on by President Barack Obama. In 2008, he explained that “If somebody wants to build a coal-powered plant, they can; it’s just that it will bankrupt them.” Hillary Clinton was not any friendlier, famously saying, “We’re going to put a lot of coal miners and coal companies out of business.”
So KOL is well-positioned to benefit from at least two global realities: First, China continues to suffer from profound energy demand and will grow into the future. Second, U.S. coal is allowed to continue operating without the regulatory burden of the Obama Administration. This will translate to strong energy markets in the next four years.
KOL, with its geographic diversification, is likely to resume its strong bullish growth in coming months. It is positioned to function as both an international investment with emphasis on China, and a domestic investment as the U.S. regulations are eased, allowing coal companies to continue operations. With more than 90% of U.S. coal used for electricity generation, this is a resource that cannot be ignored, and is going to continue expanding in the future. Coal is also used for manufacturing of steel and many other applications.
For energy, whether focused in China or the United States, the future is promising.