Last September, I said the new PowerShares Global Coal Portfolio was well-constructed but poorly timed in light of the bear market. Now, it might be a good time to revisit this exchange traded fund.
Coal stocks are generally more volatile than large oil companies. Adding more potential volatility to a portfolio during a bear market is probably a bad idea. Instead, investors should boost volatility after a big decline or as stocks rise. The market might be at that point now.
In that first article, I compared the PowerShares Global Coal Portfolio to the Energy Select Sector SPDR Fund , noting that the PowerShares fund would decline more in a down market. That trend played out, but the coal fund has since rebounded, soaring 69% this year as the SPDR fund rose 1.7%.
The reasoning behind this discrepancy is simple. The Energy Select Sector SPDR is heaviest in Exxon Mobil at 21% and Chevron at 14%. These are comfort stocks that offer steady performance late in the bull-market cycle and during bear phases. However, they're less likely to lead a new bull market cycle because they're more mature companies.
PowerShares Global Coal Portfolio allocates 24% of its assets to stocks in China, 19% to Australia and even 8% to Indonesia. The U.S. is the largest country weighting with 33% of the fund.
The PowerShares fund is less concentrated than the SPDR portfolio. Five stocks in the PowerShares fund have weightings larger than 6%, including China Shenhua Energy, Cameco and Peabody Energy .
The PowerShares Global Coal Portfolio has only 10% of its holdings in coal stocks. Cameco, for example, is one of the world's largest uranium companies and doesn't mine coal. I asked PowerShares to explain the small coal weighting for this article and the last one, but didn't get an answer. I don't think uranium exposure is negative, but anyone interested in the fund needs to know the reasons behind this strategy.
Investors who use ETFs to build portfolios based on industries can manage volatility by rotating exposure. When the market appears vulnerable to a large decline, (for example, when the S&P 500 Index has breached its 200-day moving average) it makes sense to cut positions in coal, oil sands or alternative energy. When the market appears to be recovering, it's time to reinstate those stocks. Coal stocks are going to be more volatile than large oil companies most of the time. As you manage your portfolio, keep in mind that this volatility will usually be good on the way up and bad on the way down.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of 'Random Roger's Big Picture Blog.'
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