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ETF Update: Uranium Plays, Commodities, Financial ETFs

by: Tom Lydon posted on: July 15, 2008 | about stocks: DBC / GCC / GSG / IAT / KBE / KRE / NLR / NUCL / PJB / PKN

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Is There a Uranium ETF In the Future? Until Then, Exposure Can Be Had In Nuclear Funds

The price of uranium has been ticking higher, making nuclear-focused ETFs attractive.

At the time, Richard Kang for Seeking Alpha wrote an article about the price increases last year, ways to get diversified exposure to uranium was through stocks for companies such as Uranium Participation Corp (U) and Cameco (CCJ).

Fast-forward one year, and investors have now got three ways to access the market for nuclear energy: the Market Vectors Nuclear Energy (NLR), Barclays iShares Global Nuclear Energy (NUCL) and PowerShares Global Nuclear Energy (PKN).

Evidence is pointing to emerging markets as the particular market for future growth for nuclear energy, where the stigma and reputation towards it is not as great as it is here in the United States. The need for nuclear energy in the developing countries is obvious when you consider the competition for oil within the United States and China. They are in need of alternative energy choices the most.

Kang’s major question is now, do you invest in uranium prices or uranium producers? He suggests going into nuclear energy as an alternative energy or emerging markets play. Uranium producer space is limited to a few heavies and then to many microcaps and the holding list for the ETFs doesn’t give enough information, so there is some research involved if you are interested in uranium as a commodity.

While there’s no uranium futures ETF, futures are traded on the New York Mercantile Exchange (NYMEX). There are no uranium futures ETFs currently in registration, so if this is an area you’re interested in targeting, you might have to wait awhile.

This illustrates one of the many advantages of ETFs: they simplify what would otherwise be very complex transactions.

For now, the ETF options are restricted to the area of companies that deal with nuclear energy.

NLR has an expense ratio of 0.65% and is 31% allocated in companies involved with nuclear generation. Japan is 29.9% of assets, followed by Canada at 19.7% and the United States at 17.9%.
NUCL has an expense ratio of 0.48% and is allocated 54.7% in utilities and 24.7% in energy. The United States is the top country in the fund, with 30.7% of assets, France is 15.7% and Canada is 15.4%.
PKN has a 0.75% expense ratio. It’s 44.7% allocated in industrials and 24.9% in utilities. The top country holdings are the United States (34.8%), Japan (24.9%) and Canada (11.9%).

It’s All In the Construction With Commodity ETFs

When it comes to ETFs, investment strategy can make all the difference.

Since the year is past the halfway mark, it is fair game to start comparing ETFs within the same sector, and ETFGuide compares three funds which track commodities. The commodities sector has been the one of the most successful for 2008, but the three funds are delivering different results.

iShares S&P GSCI Commodity Indexed Trust (GSG) is up 44.8% and uses a passive method for selecting commodities. GSG weights upon world production, measuring the average production over the past five years.

PowerShares DB Commodity Index (DBC) is up 47.1% and has a different process for selecting and weighting which commodities are tracked on the DB Liquid Commodity Index-Optimum Yield Excess Return Index. DBC is composed of futures contracts on six commodities, with 55% toward energy commodities, using a modified equal-weighting strategy.

GreenHaven Continuous Commodity Index (GCC) is up 21.9%, and uses the same passive method for selecting commodities as GSG. GCC follows the Continuous Commodity Index Total Return, an equally-weighted basket of 17 commodities.

As a consumer, the commodities boom can make you feel pinched, but the bull market of raw materials is a tremendous investment opportunity.

So why start now and incorporate commodities into your portfolio? There are two reasons that Brian O’Keefe for Forbes believes putting your money into resource markets can get you ahead.

For one, the current highs are representing a market top, but are not actually the peak, according to Jim Rogers. Even if a short-term correction were to occur, the bull market still has a long way to go.

Another reason to add commodities to your portfolio mix is that some experts suggest that they seem to offset inflation. For both of these reasons, a growing number of planners and advisors are putting 5-10% of a portfolio into commodities. It’s a new wave and some say it isn’t overly aggressive to propose a 10% allocation at this point. However, it all depends on your preference.

Fannie, Freddie Bailout Plan Doesn’t Appease Financial ETFs

Financial ETFs traded sharply lower yesterday, in spite of a spelled-out government plan to toss a lifesaver to Fannie Mae (FNM) and Freddie Mac (FRE).

The plan, in short, is meant to show that the government is ready to take any steps necessary to prevent the credit crisis from taking over the financial markets. The Federal Reserve said it would lend money to Fannie and Freddie if needed, reports Jeannine Aversa for the Associated Press. Last week, Treasury Secretary Henry Paulson said no to plans of a bailout, but the market’s reaction might have changed that thinking.

Markets around the world reacted in differing ways to the plan. Most Asian markets gained, then lost those gains. European markets were up, and major indexes in China and the Philippines were higher, too. One analyst says the government’s commitment to Fannie and Freddie is a confidence boost for global markets, says Louise Watt for the Associated Press.

Even with renewed commitment from the government, though, analysts are still predicting that more banks are going to fail. While the nation’s banks are in less danger than they were in the late 1980s and early 1990s after the savings and loan crisis, it’s still not pretty.

Our current troubles are growing so rapidly that 150 out of 7,500 small and mid-size banks around the country could fail over the next 12 to 18 months, reports Louise Story for the New York Times.

Brett Steenbarger for Seeking Alpha wonders how many other failures are out there, too. He took a look at the year-to-date performance of every publicly traded bank and savings and loan institution and found that those doing the best in their sector appear to have conservative lending practices, no subprime residential loans and no major problem loans to over extended real estate developers. Granted, none of these banks were really in “hot” real estate markets.

Among the financial ETFs trading lower yesterday: