Kiplinger.com

New Way to Ride Nuclear's Revival

Discussion Policy
Comments that include profanity or personal attacks or other inappropriate comments or material will be removed from the site. Additionally, entries that are unsigned or contain "signatures" by someone other than the actual author will be removed. Finally, we will take steps to block users who violate any of our posting standards, terms of use or privacy policies or any other policies governing this site. Please review the full rules governing commentaries and discussions. You are fully responsible for the content that you post.
Amy Bickers, Associate Editor,
Kiplinger.com
Monday, May 12, 2008; 12:00 AM

Nuclear power, long reviled as a dangerous source of energy, is on the verge of a comeback. That's because a growing body of scientists, politicians and environmental activists see atomic energy as part of the solution for global warming and our ever-growing dependence on foreign oil, much of it from nations that, if not downright hostile toward us, certainly don't share our values.

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.

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.

The nuclear industry has been under a cloud for much of the past three decades, mostly because of concerns over accidents at such places as Three Mile Island, in Pennsylvania, and Chernobyl, in Ukraine.

Why is resistance to nuclear subsiding? Nuclear power emits relatively small amounts of greenhouse gases, which are thought to be responsible for global warming. Moreover, spent nuclear fuel is compact and, unlike carbon dioxide emissions, can be easily transported to waste-storage facilities (although there is considerable controversy over where those facilities should be located).

Meanwhile, global energy demand will rise by 50% between 2005 and 2030, the International Energy Agency predicts. "At the same time that our planet has growing global power needs, governments are trying to cut greenhouse gas emissions," says Richard Phillips, an analyst with S-Network, which co-developed the WNA index. "Policy officials recognize that nuclear energy needs to be part of the mix of alternative sources."

Nuclear power produces about 16% of the world's electricity, but that proportion is likely to grow. There are 27 reactors currently under construction around the world.

The index tracked by the Powershares ETF weights companies according to the percentage of revenues that come from nuclear activities. Power generators account for one fourth of the fund's assets, while technology companies, equipment makers and related service providers represent another quarter. Most of the remainder of the assets are spread among fuel sources, reactor vendors and construction companies.

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.

The PowerShares product isn't the only nuclear ETF. Van Eck's Market Vectors Nuclear Energy ETF ( NLR) seeks to mirror the DAXglobal Nuclear Energy index. The Van Eck ETF, which closed at $32.58 on May 8, has lost 16% since its inception last July.

Market Vectors, which holds 35 stocks, shares a number of common holdings with the PowerShares ETF. But the funds emphasize different parts of the industry. Market Vectors has a 42% weighting in companies that mine uranium, giving it the flavor of a natural-resources fund. PowerShares Global Nuclear tilts more toward companies that will build new plants and modernize some of the 439 existing facilities.

Because these are narrow sector funds, they should play only a minor role in your portfolio. While nuclear energy holds promise as one of the solutions for global warming, hurdles remain, not least of which is the matter of disposing of the spent fuel. And an accident at a nuclear plant would be calamitous for the stocks.

The annual expense ratio for Market Vectors Nuclear Energy is 0.65%. For PowerShares Global Nuclear Energy, it's 0.78%.


© 2008 The Kiplinger Washington Editors