Portfolio Checkup

China has become the largest importer of coal with fellow emerging-market country Indonesia recently becoming the second-largest importer. While estimates for future, foreign demand vary widely, the International Energy Agency is calling for coal to “come close to surpassing oil” for the world’s largest energy source by 2017.

These sorts of predictions are often subject to revisions and updates but it is clear that even if demand continues to decline in the U.S. there are many emerging markets where it will increase.

ETF investors who believe the emerging market tail winds will help the stocks in the group recover and prosper have had two ETFs to choose from with the Market Vectors Coal ETF and the PowerShares Global Coal Portfolio. Now, however there will just be one coal fund because PowerShares recently announced that PKOL will stop trading in February.

This past year was not great for the energy sector in general, the Energy Select Sector SPDR lagged the S&P 500 with its 2.8 per cent gain but KOL was down 23 per cent and PKOL did slightly better with a 20 per cent decline.

The country makeup of KOL will allow it to capture any benefit from increased emerging market demand with a 21 per cent weighting to China, 10 per cent to Australia which is a large exporter of coal and 9 per cent to Indonesia. The U.S. is the largest country weighting at 39 per cent of the fund but some of the U.S. companies in the fund, like Joy Global and Peabody Energy, participate in the global coal market. JOY makes mining equipment that is used all over the world and BTU has mining operations in Australia.

Other large holdings in the fund include China Shenhua Energy at 8.2 per cent, Consol Energy, 7.5 per cent, and Australian railroad company Aurizon Holdings, which transports the coal from the mines to ports to then be exported, at 6 per cent of the fund.

KOL pays an annual dividend. The most recent ex-date was earlier this week. The 2012 dividend was 42.5 cents, which gives the fund a trailing yield of 1.71 per cent. The dividend paid by the fund has fluctuated historically but future dividends could increase meaningfully if the estimates for Asian consumption come to fruition.

Future trends in Asia will be the key to whether investing in coal companies at these levels turns out to be well timed. For now this remains a speculative investment relying on a U.S. turnaround and increasing demand around the world.

At the time of publication, the author held no positions in any of the stocks mentioned.