Since its launch in August 2007, the Market Vectors Nuclear ETF (Ticker: NLR) has lost as much as 18%. Despite the early losses, nuclear energy is an investment opportunity worth considering.

The Background for the Launch of a Nuclear ETF

Nuclear power is the inevitable window into the future. Already 16 percent of the world’s electrical energy, 2658 billion KWh, comes from nuclear generation. Fully 439 reactors are online and another 222 are under construction or in the planning stages. All these plants require enriched uranium: the demand for uranium in 2008 will be about 64,615 tons and is expected to double or triple in the next few years.

There is a large number of smaller reactors that we rarely think about, but which also require care and a steady diet of uranium. There are nearly 1,000 commercial, research, and ship reactors worldwide. More than 30 are under construction and an additional 70 are in the planning stages (Council on Foreign Relations: www.cfr.org/publications/14705/global uranium supply and demand.html).

These are stunning statistics, but only the tip of the iceberg. Emerging nations and developed nations, including the United States, are placing demands on energy that can only be met with nuclear reactors. In the United States there are 104 reactors that currently produce 19 percent of the electricity. Four licenses have recently been filed with the Nuclear Regulatory Commission, NRC: www.nrc.gov/.  It seems likely that these proposals will be approved, breaking the political deadlock for reactor construction in the United States that goes back to 1979. The conservation of energy and the use of solar and wind power cannot make a dent in the needs to power great industries and grow cities. Nuclear power, with all of its problems, is the only power source that will sustain our present needs and allow for human progress. It is also free of greenhouse emissions, the ultimate test for sustained performance. 

Where does that leave us? It leaves us in the middle of a nuclear development that affects everyone. The demands for nuclear power are going to be gigantic, and they come at a moment in history when alternatives to oil, natural gas, and coal are imperative.

The problems with developing nuclear power are considerable, and the supply of enriched uranium is just one. Uranium in the ground is actually widespread and is easily mined. It is the enriching process that is a bottleneck, that is, the separation of the more reactive U-235 from the more stable U-238.

Most uranium deposits consist of about 99.3% U-238 and only 0.7% of U-235. The amount of U-235 that can be filtered from U-238 differs by country and is the factor that determines the cost of processing. Canada is the richest source of reactive U-235 (The Stock Traders Almanac). There is only one company in the United States that processes uranium, and that is USU. Its stock is available on the NYSE.

Other problems are the handling of nuclear waste and the use of billions of gallons of water in cooling and condensing steam used to turn the electricity-generating turbines (Forbes: www.forbes.com). There is now some evidence that nuclear waste can be recycled.

Technical developments are decreasing the costs of construction of reactors, as well as decreasing the dangers associated with nuclear power. According to J. Taylor Brown, writing for The Stock Traders Almanac, “With exponential increases in design, engineering, the quality of materials, and improved understanding of operations, the new plants are bigger, better, and more reliable.” Nuclear power generation is our single best energy alternative, when weighed against the environmental and social costs of oil, natural gas, and coal.

The Investment Environment

Nuclear energy stocks have been savaged the past twelve months. Uranium producers and nuclear energy developers have experienced drops in apparent value of up to 66 percent. Uranium, for example, shot up from a price of about $20 a pound in 2005 to $138 a pound a year later. Then it quickly corrected to a low of  $86, where it is currently. Losses were compounded in this drop, and some nuclear companies disappeared.

General market downturns are responsible for part of this loss, but also it has been unclear to investors how nuclear power would work in the total energy mix. Oil and commodity surges recently clarified that issue. Oil and other energy sources have suddenly become unsustainable. According to John Hughes and Scott Maragioglio, writing for TheStreet.com, November 9^th, 2007 (www.thestreet.com/p/), “The players that are left in the [nuclear] industry are benefiting from a high-demand environment with very little competition.

The investor can ponder the individual stocks, looking for the best producers and developers, but the easiest is to tap into the breadth of the market by investing in the Exchange Traded Fund, Market Vectors Global Nuclear Energy ETF (Ticker: NLR).

This ETF has a short and not altogether distinguished history. Born August 13, 2007, the ETF has been squeezed by market forces and the downdraft of the nuclear industry. The fund, at one point, has lost over 18% since its inception. Yet, for the many reasons described earlier, it appears to have superior market potential.

The basket of stocks underlying the umbrella of the ETF shows the strength of its foundation. NLR is comprised of utility companies, industrial stocks, and mining enterprises that operate or construct nuclear power facilities, and provide needed supplies and services. The top 10 holdings of NLR are shown below.

Ten Top Holdings of the Nuclear ETF NLR*

*NLR seeks to replicate the price and yield performance of the DAXglobal Nuclear Energy Index. The fund of small and medium cap growth invests about 80% of its total assets in U.S. and foreign companies, primarily those engaged in the nuclear energy business.

NLR is only now gaining traction in the marketplace, but it is positioned to benefit from increasing industry demands. It has the right combination of company participants, is diverse in asset structure and function, has global representation, and is relatively inexpensive (current quote of $31.04). Investors may see other energy plays as more important, especially until the market stabilizes, but from all indications NLR should remain on the radar screen. It is a megatrend investment.