Market Vectors Coal (KOL) Red Hot

Coal was one of our best performing sector groups in latter 2007 through summer 2008. While much of the focus of late has been on natural gas, the coal stocks have been ripping in even larger magnitude. I was a bull on coal over natural gas (although the market in its student body left trading simply moves all commodities together) because of the portability of coal over natural gas. We were early on this theme as the market was so focused on oil stocks at the time, and made a lot of money [Dec 6, 2007: Coal Stocks Quietly in Bull Market] I wrote a bevy of pieces about this 1.5 years ago... but again, the market is not very granular nowadays; it likes big sweeping themes that are simple: i.e. commodities good.

I have a litany of posts on just about every major coal producer in the archives, but for a simple way to play the sector there is an ETF which we introduced January 2008 [Jan 14, 2008: New Coal ETF (KOL) Introduced from Van Eck Global]

The Coal ETF seeks to replicate, before fees and expenses, the total return performance of the Stowe Coal IndexSM. The Index provides targeted exposure to 60 companies worldwide that are engaged in the coal industry. As such, the Fund is subject to the risks of investing in this sector.

....is another interesting ETF with a very global mix, much like MOO and a nice 1 stop shop. It is very top weighted with the 5 top names making up 35% of holdings

..... followed by fund holdings Consol Energy (CNX) and Peabody Energy (BTU) @ 7.5% and 7.3% respectively. Further down the list are two names who deal with the mining equipment end, Joy Global (JOYG) and a name I have been considering adding to the fund multiple times Bucyrus (BUCY) @ 4.6% and 4.3% respectively. Also in this group are Arch Coal (ACI), fund holding Massey Energy (MEE) which focuses on metallurgical coal, and Yanzou Coal (YZC). The entire index can be found here. By geography the US represents 40%, Hong Kong 24%, Indonesia 11%, and Australia 9%.

The ETF has 60 names, but again in a strategy I find useless the bottom third of the ETF is full of names with 0.1%, 0.2%, or 0.3% exposure.

I almost pulled the trigger on a coal name last week on the pullback but did not do so, which in retrospect was a lost opportunity. Looking at the ETF, the chart is a technician's dream - it just broke out of a double top while concurrently breaking over the 200 day moving average - hubba hubba. While volume is slowing a bit, notice the huge increase in May versus the months before.

I just went to check the current holdings to see if there have been any major changes - one of the beefs I had back then was a mish mash of names at the bottom of the ETF with 0.1%, 0.2% weights which in effect do nothing - the bottom 15 stocks could jump 30% and it would have almost no effect on the ETF. (mutual funds do the exact same thing, why they own 250 stocks when 0.2% weightings won't help or hurt your performance is beyond me) It looks like Van Eck made adjustments as there are now only 32 holdings... quite a haircut but I like it. The top 2 names are Chinese and make up 15% of the ETF but after that come a litany of names long time readers of the blog will recognize

• Joy Global (JOYG) 7.0%
• Consol Energy (CNX) 6.6%
• Peabody Energy (BTU) 5.8%
• Yanzou Coal (YZC) 5.2%
• Bucyrus (BUCY) 4.9%
• Massey Energy (MEE) 4.6%
• Walter Industries (WLT) 4.3%

Essentially your top 10 holdings represent 60% of the ETF. In slots 12-14 come the other major US players - Alpha Natural Resources (ANR), Foundation Coal (FCL), and Arch Coal (ACI) clocking in at 3.2 to 3.5% weightings. (so in the top 15 holdings you are up to a 75% weighting) Our former holding James River Coal (JRCC) is a 1.6% and the daytraders favorite Patriot Coal (PCX) is at 1.3%.

Geographic Distribution increased in the US with 48% exposure and China (which they represented as Hong Kong last year) flat at 24%, Indonesia up a bit, and Australia down a bit.

Usually I skew to individual stocks over ETFs but as we've said too many times to count, we are in an era where themes and sectors dominate and the individual stocks inside those sectors seem to matter little. In that sort of atmosphere sector ETFs make a lot of sense... especially in the commodity space - when natural gas or fertilizer or steel go up - all the stocks in the group go up; it is just a matter of degree. There is very little differentiation among stocks in these groups by traders. So unlike pre summer 2008 when individual stock picking mattered more; the dominance of ETFs seems to have changed the game. Further, specific to coal there are about 8-10 choices (including the 2 major equipment makers for coal mining) in the US exchanges unless you choose to get into very speculative small cap names, so this type of top heavy ETF actually makes even more sense.

And it appears for now, with speculators fleeing the (ahem) safety of the dollar, commodities are enjoying favored status...

No position