Friday, May 09, 2008

Pennies from Heaven: A Nuclear Stock Fund

For those of you more engaged with your financial portfolios than wewallstreet are, take a look at this, courtesy of Kiplinger:

Investors who want to ride nuclear's revival without betting on individual stocks have a new option. Invesco PowerShares last month launched an exchange-traded fund called the Global Nuclear Energy Portfolio (symbol PKN). The ETF tracks the performance of the World Nuclear Association (WNA) Energy Index, which contains 64 companies that design, construct and operate nuclear power reactors. The shares closed at $27.08 on May 8.

And the fund is jam packed with the usual suspects, minus of course Keyser Soze:

The ETF's biggest holding, at 8.5% of assets, is Areva (ARVCF.PK), a French company. "Areva is one of just a handful of publicly traded companies in the world that both designs and builds reactors," says Phillips.

Other big holdings include Japan's Toshiba (TOSBF.PK), Emerson Electric (EMR) and Canada's Cameco (CCJ), a leading producer of uranium, the raw material that becomes fuel for nuclear reactors.

Writer Amy Bickers reviews the reasons nuclear has sprung back to life and offers a definition of an ETF:

ETFs are funds that track a particular index and trade on exchanges just like stocks. ETF prices move up and down, in line with the value of the securities they hold. ETFs contain mechanisms that keep the share prices close to the value of their holdings.

Whether the electricity market in general is responsive to this kind of financial instrument, we have no idea. If you took our advice on stocks, you'd have only yourself to blame if your next home was a giant-screen TV box in a low traffic corner of your local public park.

Perhaps the more financially savvy members of our readership can weigh in on the virtues and vices of this kind of offering. For us, it's interesting that outfits creating such offerings find nuclear energy something that might appeal to potential buyers.


robert merkel said...

For anyone thinking of investing in such a fund, some general comments (and, remember, I'm just some random guy on the internet).

The first thing to note is that this is an index-tracking fund. They're not trying to pick which nuclear companies are going to make money; they're investing in all the ones the make up the index, according to their weighting in the index (which is in proportion to their size). This is in contrast to actively-managed funds, which try and pick stocks which they think will outperform an index (perhaps this index, perhaps another). In practice, some actively-managed funds do, some don't. It's hard to find ones that do it over the long term by enough to justify their higher management fees.

So, in a sense, the general idea of an nuclear-industry index tracking fund represents a good way to invest your money in the nuclear industry, without trying to pick which stocks are specifically going to do well, and without paying the excessive brokerage of buying lots of small parcels of shares - not to mention the hassle of trying to buy stocks not traded in the USA.

However, there's a big caveat here, which features rather prominently in the article itself:

Because these are narrow sector funds, they should play only a minor role in your portfolio.

Basically, while the risk might be spread across companies, there are any number of factors that might cause most or all of the nuclear stocks to tank at once.

The big scary one is of course a nuclear accident, but there are others. For instance, what if some of the renewable energy technologies start to live up to the more extravagant promises made by their backers? Or what if some startup company develops a new, cheap, and small reactor design (hello Rod), starts manufacturing them en masse in, say, India, and exports them to the world? Or, more prosaically, what if CCS technology starts to deliver on its promises, and lots of existing coal-fired power can get retrofitted with the tech, and thus a lot fewer nuclear plants are required?

A common theme on NEI Nuclear Notes has been the risks of putting all our energy eggs in one basket. The same applies to investments. I think nuclear energy has a big future, but I wouldn't be betting my entire life savings on it!

Joseph Somsel said...

One problem with such a fund is that most companies with significant nuclear work are internally well diversified. That is, nuclear makes up only a small fraction of the overall stock value. Hence, a boost in nuclear profits will have little effect on the overall stock price.

For example, GE's nuclear business today does less than $2 billion out of a total company revenues of $175 or so.

There will be profit opportunities but they will be in services or small, specialty manufacturing. Those companies either don't exist today or are hard to find.

Beware mining companies involved in yellowcake. The spot market price is not very indicative of real market price since most yellowcake is traded under long term contract. Besides penny mining stocks are rather notorious for, shall we say, "gamesmanship."