Niche Energy ETFs as Contrary Indicators

The advent of the exchange-traded fund (or “ETF”) has revolutionized the way people can invest, not least because it makes it very easy to compose a portfolio of certain stocks around a given theme.  There are specialty ETFs that track such corners of the market as social media stocks, timber-related companies, and so on.  However, it may be no coincidence that the inception date of some of these niche ETFs has coincided with a peak valuation in the underlying theme.  This is especially true in the energy sector, where once-hot themes as nuclear energy, coal, and solar propelled the launch of several ETFs that tracked the fortunes of these themes, and, perhaps, marked their apex.

Take, for example, the the nuclear power sector.  From 2005-2007, the global price of uranium exploded higher as traditional sources of energy like oil and natural gas climbed ever higher:

Naturally, uranium miners and anything else tied to nuclear power exploded higher alongside uranium.  The price of uranium peaked around June of 2007, just before fund company VanEck launched its Vectors Uranium+Nuclear Energy ETF, symbol $NRL.  The fund, now with less than $36 million in assets, has since delivered annualized returns of about -6% from inception through October:

(source:  Morningstar)

Similarly, the price of coal followed other energy-related commodities higher, culminating in one of history’s less-discussed bubbles:

Just before the price of coal peaked in mid-2008, VanEck’s luck at market timing once more proved to be poor as it rolled out the Vectors Coal ETF, symbol $KOL, in January of 2008.  As with its nuclear energy-related sister fund, $KOL’s launch just about coincided with the peak in the underlying commodity, and it has struggled, “delivering” annualized returns of -10.6% through October:

(source:  Morningstar)

Finally, the solar sector has also fallen victim to the same fad investing as befell coal and nuclear.  Now, it is difficult to illustrate the underlying “commodity’s” relationship with oil, but, historically, solar stocks have tended to rise with the price of oil, the logic being that ever higher fossil fuel prices would push energy producers and consumers to solar.  That can be seen by showing the performance of a basket of solar stocks (First Solar, SunPower, and Trina Solar; I picked them randomly) vs the price of oil (data from Morningstar):

One can see that the performance of the solar stocks and the price of oil have diverged since 2011, but in the preceding four years, they tracked one another very closely:

As many will recall, the price of oil rocketed higher in 2008, peaking in the summer of that year around $147 per barrel.  Naturally, solar stocks also climbed ever higher along with oil, and, in April of 2008, Guggenheim took advantage of the interest in solar stocks by launching its solar ETF, symbol $TAN.  Since its inception, $TAN’s performance has been abysmal, averaging negative annual returns of around 24% through October.  To put that in perspective, a $10,000 investment in $TAN at its inception would now be worth less than $1,000:

(source:  Morningstar)

It is true that perhaps these are unfair examples, and I’m sure other niche ETFs in other spaces have prospered.  However, if recent history is any guide, investors should beware that the issuance of new ETFs tracking hot commodities and the fortunes of companies tied to them may be signalling an inflection point.

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